No standards, and poor reasoning, in U.S. downgrade
I can’t remember the last time something as telegraphed beforehand as the Standard & Poor’s downgrade of the federal government’s credit rating was discussed as if it were so shocking to so many people. S&P said a couple of weeks ago that it wanted to see a package of $4 trillion in deficit reductions to go along with the debt deal, or else a downgrade was coming.
Ratings agencies don’t get to set budget policy in this country, and Congress decided to do something else. Congress doesn’t get to set credit ratings in this country, and S&P decided to make good on its threat. The company really wouldn’t have had a shred of its credibility — you might say the very last shred of its credibility — left if it hadn’t done so. In the end, I think that’s what this move was really about: The company unwisely placed a stake in the ground of the debt-ceiling talks, and then had no choice but to do what it had threatened to do.
Why do I think that’s what it was about? Because it certainly wasn’t about the nation’s creditworthiness. The holes in S&P’s logic for choosing this particular time to issue a downgrade tell us as much.
Democracies are messy, and at their messiest when passions run high and opinions are divided. Despite S&P’s tsk-tsking after the fact, there was zero chance Congress was going to let the Aug. 2 deadline come and go without some kind of a deal. Zero. No leader of either party in either chamber of Congress, nor the president, ever voiced a willingness to do so. They framed the debate in terms of what would come along with the inevitable raising of the debt ceiling. Although there were some individual members who voiced a willingness to risk it, the margins of the votes in both the House and the Senate were so large as to demonstrate that these voices, while loud, were far from influential enough to carry the day. Markets were already pricing in the risk of a default before the deal was struck, and you may have noticed that the really big losses didn’t come until afterward (when there just happened to be a lot of other unpleasantness going on elsewhere in the world).
And regardless of whether you agree with my assessment of the chances that Congress would fail to reach a deal, the fact is that a deal was reached. Debts are being serviced just as they were before. S&P is essentially trying to predict the ending of the next debate, which will take place in an entirely different context (i.e., not up against a deadline for raising the debt ceiling).
So we’re back to the size of the reductions. And there are three important points to note here.
- I can neither recall nor locate any statement from S&P when President Obama initially asked for a “clean” increase in the debt ceiling that indicated such a move would have led to a downgrade — even though such a move would have been far worse, given S&P’s rationale now, than what we got in the end.
- The entire history of the U.S. debt ceiling before last week went like this: President asks for increase, Congress grants increase, with no strings attached. I know this, because Democrats pointed it out ad nauseum during the debate as a reason why there should be a clean increase (that is, when they weren’t trying to claim the high ground with Obama’s never-specified plan for $4 trillion in cuts). So, for there to have been any cuts at all attached to the ceiling increase was a historic moment for changing the direction of the nation’s fiscal policy for the better. And how does S&P react? By saying it should have been an even more historic moment.
- In the end Republicans and Democrats, House and Senate, did agree — again, by sizable margins — to almost $1 trillion in new spending caps and the broad outlines of a further $1.2 trillion to $1.5 trillion in further reductions. The political process worked. It may have been messy, it may have been ugly, it may ultimately have satisfied no purists of any stripe. But it worked. The language S&P used in its press release would lead someone who’d gone to sleep July 28 and just awakened to believe no deal had been reached.
As for S&P’s hand-wringing that there won’t be a substantial policy consensus until after next year’s election: There’s an election next year? When did someone put that on the calendar?!?
It’s almost enough to make one wonder whether the folks at S&P had ever before watched any political process — or, indeed, even any contentious and high-stakes business negotiations — take place.
One final point about S&P’s statement itself. If you want to find a lie within it, look for the line about S&P’s having no opinion as to the balance between tax increases and spending cuts. Baloney. The only other way to understand the statement, aside from S&P having left itself no option but to make good on its threat, is to view it as a call for higher taxes. It’s the right of the folks at S&P to believe that’s what should happen, but the fact that taxes haven’t gone up yet has nothing to do with the actual creditworthiness today of the U.S. government.
If we deserve a downgrade, we deserved it a long time ago.
***
Now, all that said, is there any merit to the idea that the United States is a riskier investment today than it was as of Friday afternoon — or even as a result of the tense debt-ceiling negotiations? Should everyone be spooked by U.S. political wrangling?
The markets certainly didn’t think so last week; investors drove down the yields on U.S. Treasurys that they viewed as safe havens. We’ll see what happens today. But Moody’s and Fitch still have Uncle Sam rated AAA, and my understanding is that, from a technical standpoint, that should mean little or no fallout from S&P’s downgrade (i.e., banks aren’t going to have to sell off a bunch of Treasurys just because S&P has them at AA+ now).
From a psychological standpoint, things may be different. But I doubt that anyone saw S&P’s downgrade and realized for the first time that the U.S. government has racked up an alarming amount of debt and has yet to implement no plans to begin reining in said debt. Again, this is not news. The tea party sounded this alarm bell almost two and a half years before S&P got to ringing (and, irony of ironies, is now getting the blame for the downgrade in many quarters).
If there is some good to come out of S&P’s move, it will have to be a sharpening of focus and attention in Washington to make tough choices sooner than later. There may be greater public pressure on members of Congress to do something bold in the way of reforming the tax code and entitlements.
If would be for the good if they were so prodded. But again, prodding politicians isn’t a ratings agency’s job.
– By Kyle Wingfield
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168 comments Add your comment
Linda
August 8th, 2011
9:23 pm
Moderate@8:52, Ho Hum.
@9:03, Ho Hum, again.
S&P’s statement said we have to cut entitlements, specifically Medicare, to get out of our hole, NOW.
READ IT.
You are a progressive/Democrat who is in denial if you are “not advocating cutting” these entitlement programs that S&P claim MUST be cut to sustain the US of America.
S&P is the least of our worries. China has already downgraded us & Moody’s is not far behind. We already have 3 programs we can’t afford, & Obama & the Democrats have added a 4th. We are doomed until a Republican is elected.
Moderate Line
August 8th, 2011
9:29 pm
Rafe Hollister
August 8th, 2011
9:16 pm
Moderate, we get it, you are rambling and are not sure what you are or what you believe, somewhat like the Spender in Chief.
++++
I have stated very clearly that I believe Milton Friedman over Krugman and Keynes so I don’t know where you are coming from. All I see is people repeating talking points or cliches that they have obviously never thought about. The whole idea that WWII got us out the depression orginated with Keynes.
Franklin Roosevelt was at first no fan of Keynes — “I didn’t understand one word that man was saying,” he sniffed after being lectured by Keynes at the White House in 1934 — but some of his economists gradually began to lean on Keynesian language and logic to rationalize huge deficits. In World War II, Washington planners used Keynesian ideas to formulate their policies of deficit spending
Whe the economy recovered after WWII was when the United States started following Keynes economics because they believe that WWII deficit spending got us out the depression.
Read more: http://www.time.com/time/magazine/article/0,9171,842353,00.html#ixzz1UUUtfd4Z
Moderate Line
August 8th, 2011
9:32 pm
Linda
August 8th, 2011
9:23 pm
Moderate@8:52, Ho Hum.
@9:03, Ho Hum, again.
S&P’s statement said we have to cut entitlements, specifically Medicare, to get out of our hole, NOW.
READ IT.
You are a progressive/Democrat who is in denial if you are “not advocating cutting” these entitlement programs that S&P claim MUST be cut to sustain the US of America.
S&P is the least of our worries. China has already downgraded us & Moody’s is not far behind. We already have 3 programs we can’t afford, & Obama & the Democrats have added a 4th. We are doomed until a Republican is elected
++++
I have voted Republican in every election since George Bush I so I am not sure how a person who supports Milton Friedman theories can be considered a Progressive. Also, if S&P feels so strongly about entitlement spending why does Canada, UK, Sweden, Finland have AAA ratings. It seems somewhat of a contradiction.
Please explain how those countries have higher entitlement spending but yet are AAA ratings?
Moderate Line
August 8th, 2011
9:39 pm
Linda
August 8th, 2011
9:23 pm
Moderate@8:52, Ho Hum.
@9:03, Ho Hum, again.
S&P’s statement said we have to cut entitlements, specifically Medicare, to get out of our hole, NOW.
READ IT.
You are a progressive/Democrat who is in denial if you are “not advocating cutting” these entitlement programs that S&P claim MUST be cut to sustain the US of America.
S&P is the least of our worries. China has already downgraded us & Moody’s is not far behind. We already have 3 programs we can’t afford, & Obama & the Democrats have added a 4th. We are doomed until a Republican is elected
+++++
Linda
August 8th, 2011
9:23 pm
Moderate@8:52, Ho Hum.
@9:03, Ho Hum, again.
S&P’s statement said we have to cut entitlements, specifically Medicare, to get out of our hole, NOW.
READ IT.
You are a progressive/Democrat who is in denial if you are “not advocating cutting” these entitlement programs that S&P claim MUST be cut to sustain the US of America.
S&P is the least of our worries. China has already downgraded us & Moody’s is not far behind. We already have 3 programs we can’t afford, & Obama & the Democrats have added a 4th. We are doomed until a Republican is elected
+++++
We lowered our long-term rating on the U.S. because we believe that the
prolonged controversy over raising the statutory debt ceiling and the related
fiscal policy debate indicate that further near-term progress containing the
growth in public spending, especially on entitlements, or on reaching an
agreement on raising revenues is less likely than we previously assumed and
will remain a contentious and fitful process.
It seems you leave the “or” part out which is what I have stated over and over in my post.
http://www.standardandpoors.com/home/en/us
Lil' Barry Bailout (Revised Downward)
August 8th, 2011
9:46 pm
The S&P merely state the obvious–Obozo’s unsustainable deficits can be fixed by cutting spending or increasing revenues. Because Obozo has exploded spending to 25% of GDP, the only viable course of action is spending cuts. Any revenue increases will have to come via economic growth.
Rafe Hollister
August 8th, 2011
9:48 pm
Moderate
You are trying to make things too complicated. It boils down to this. If you gave Barry the choice, Keynesian, Supply Side, or Trickle Down, he would vote Present.
Linda
August 8th, 2011
9:48 pm
Moderate@9:32, I did not get the impression from reading the S&P press release that S&P feels strongly about entitlement spending, except that it is unsustainable. Again, READ IT for yourself. I can’t explain how other countries, who have higher entitlement spending & still maintain AAA ratings (if your assumption is true), unless they have managed to do what the US MUST do to sustain these programs. Evidently, other AAA countries have lower debt to GDP than the US & are on track for lower debt to GDP than the US.
Linda
August 8th, 2011
9:58 pm
Moderate@9:39, Typical liberal. Keep on reading. Go to that paragraph that states, “The political brinksmanship…the plan envisions only minor policy changes on Medicare & little change in other entitlements, the containment of which we & most other independent observers regard as key to long-term fiscal responsibility…”
I read S&P’s report in its entirety at least 5 times. I suggest you do the same. Get back with me when you do. Until you read it & comprehend it, don’t bother me again.
Moderate Line
August 8th, 2011
10:00 pm
Michael H. Smith
August 8th, 2011
9:19 pm
B) We were specifically talking about WWII and it’s affect on the Depression so in order to prove your point you switch to the Banna Wars. How do the Banna wars show how the United States acted as Rome did during WWII? Did we plunder Japan? Did we plunder Germany? Did we plunder Italy? We rebuilt Europe and Japan.
I am well aware of the policies that we carried out in Latin American but their connection to WWII is lost on me.
~
I can stick strictly to WWII it if means anything to you but really it won’t. My reason for jumping was in fact due to your expansion by way of this: (we) rebuilt the actual countries we beat. No we haven’t rebuilt all the countries we beat Banana Wars and CIA Guatemalan civil war are prime examples.
Now we’re onto that rebuilding. We rebuilt part of Germany, some of Europe and gave the other half to the communist U.S.S.R. along with a good deal more of Europe. Very noble of us. Nevertheless, perhaps we learned how to avoid WWIII in Europe by doing so, though, we did it through “our will be done nation building” for our own benefit more so than for that of Germany and Japan.
Now once and for all on your Keynes economics business, much of which took place BEFORE WWII in the form of the New Deal, which is not seemingly directly related to WWII but it could be argued the War effort made possible the biggest public works program ever imaged. However, had we lost that war, WWII, and been out gunned so to speak, it would have been very clear even more so than in our winning of it that we were operating under the Rule of Roman economics and not that of Keynes.
You can argue all you want from this point on but I’ll not join you further for the point has been overly made by half, IMHO. War redistributes wealth and settles debt by the simple means of who out guns whom, “might alone is right” and determines the prosperity or austerity thereafter, to which Keynes economics is irrelevant.
++++
I agree with everything wrote. If we had lost WWII we would not have had an economic recovery. However, in modern warfare between two equal powers victory does not mean an economic bonanza. For example, France was completely devastated in WWI. Russia collasped even though it started out on the wining side. France and the UK and most of Europe was on the winning side.
The Keynes economist used WWII to prove their point that stimulus spending worked because WWII happen and then the economy grew.
Moderate Line
August 8th, 2011
10:01 pm
The Keynes economist used WWII to prove their point that stimulus spending worked because WWII happen and then the economy grew.
+++
I do not believe this to be true but that is what Krugman and his cohorts believe.
Moderate Line
August 8th, 2011
10:03 pm
Linda
August 8th, 2011
9:58 pm
Moderate@9:39, Typical liberal. Keep on reading. Go to that paragraph that states, “The political brinksmanship…the plan envisions only minor policy changes on Medicare & little change in other entitlements, the containment of which we & most other independent observers regard as key to long-term fiscal responsibility…”
I read S&P’s report in its entirety at least 5 times. I suggest you do the same. Get back with me when you do. Until you read it & comprehend it, don’t bother me again.
+++
I did to but is interesting that in your argument you leave the part out about increasing revenues.
Moderate Line
August 8th, 2011
10:11 pm
Rafe Hollister
August 8th, 2011
9:48 pm
Moderate
You are trying to make things too complicated. It boils down to this. If you gave Barry the choice, Keynesian, Supply Side, or Trickle Down, he would vote Present.
++++
You are probably correct. I could not tell from one minute to the next what he was for in the debt ceiling debate. I didn’t vote for Obama because I have never voted for Democrat(but yet I am a progressive Democrat) but I never felt he had enough experience to do the job but at the same time the truth is the truth. S&P mention both cuts and revenue increase. I don’t believe in omitting facts to prove a point. I believe the facts prove Obama has done a lousy job. I also don’t need to put words in peoples mouth. The stimulus was a big waste of money.
However, I do know what Keynes economics is and monterist economics are.
Moderate Line
August 8th, 2011
10:12 pm
And to that I bid a good night.
Linda
August 8th, 2011
10:26 pm
Moderate@10:03, I did not omit revenues. You did. You have not brought them up in your discussion with me. Increasing revenues does NOT mean increasing taxes. The Republicans have a plan. If you were a Republican, you would know EXACTLY what it is.
@10:11, Now the truth comes out. You are not a moderate. You admit your are a progressive, the most left-wing, liberal arm of the Democratic party. Do you even know who you are? You are for destroying the US as we know it. God rest your soul.
Herbert
August 8th, 2011
11:10 pm
Meanwhile, WWIII brews in Europe. It’s like deja vue all over again.
Lil' Barry Bailout (Revised Downward)
August 9th, 2011
6:20 am
Obozo’s Emily Litella moment–he thought he was supposed to implement KENYA’S economics.
“Oh. Never mind.”
Logical Dude
August 9th, 2011
4:34 pm
Kyle says:
No, Logical, I’d say the general gist of the column is that, while there’s plenty wrong with the nation’s finances, the particular reasons S&P gave for choosing now as the time to downgrade are well off the mark.
I’ll agree that my reaction to seeing the stock market plunge meant that the market saw the downgrade as troubling. Today’s rebound means that they pretty much agree with your column. Not much has actually changed, and there is a lot of buy-back.
I did agree with much of your column, but did take exception to the line about there not being much affect (and I guess at closer reading, you meant only the treasuries – which was easy to miss at a casual reading).
Of course, I also agree with the part of your column that stated that the US should have been downgraded long ago. But now is as good of a time as any to put the US’ fiscal picture on display. It will take a lot of work to get us out of our debt. INCLUDING BOTH REVENUE INCREASES AND CUTS TO MEDICARE AND SOCIAL SECURITY.
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August 11th, 2011
11:35 am
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