Saturday, August 6, 2011

The real reasons for the S&P downgrade

I’ve been struck in the short time since yesterday’s announcement by the way pundits of all political persuasions have been using the downgrade to support their point of view.

Republican House Speaker John Boehner said in a statement that the downgrade “is the latest consequence of the out-of-control spending that has taken place in Washington for decades.”

Democratic Senate leader Harry Reid said in a statement that the downgrade “reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners.”

Press secretary Jay Carney, speaking for the White House, said it's clear Washington "must do better" in tackling soaring deficits and other economic woes.  According to the Associate Press:

A statement from Carney said talks that produced Tuesday's $2 trillion compromise on raising the U.S. borrowing limit had been too drawn-out and "divisive."

So -- was the downgrade due to the Democrats’ “out-of-control spending”?  Republican intransigence that resulted in lack of a “balanced approach?”  The “divisiveness” of the process?

Given this politicization, it’s important to read the actual S&P report to know the real reasons for the downgrade.  From the report’s page-one Overview:

  • The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics. 
  • More broadly, 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. 
  • Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us 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. 
And from the “Rationale” section of the report:

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..... [the] differences between political parties have proven to be extraordinarily difficult to bridge, and ... the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.

That “comprehensive fiscal consolidation” refers to the $3+ trillion “grand deal” President Obama and Speaker Boehner had been working on. 


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. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Let’s be clear: the downgrade was the result of a deal that produced too little, too late, and revealed a government that was more dysfunctional (Jay Carney’s term “divisive” is right-on) than had previously been understood. 

Let’s also be clear: S&P has no preference about how the government chooses to reduce the deficit – all spending cuts, all revenue increases, or a combination of both.  S&P writes: 

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

They just want to see action that addresses the magnitude of the problem.

In order to get the country’s triple-A credit rating back, two things will have to happen.  The medium-and-long term debt and deficit need to be reduced. (Note that S&P said  nothing opposed to additional near-term stimulus spending to address the current weak economy.)  And civility will have to be restored to Washington.

Have no doubt that this first-ever downgrade of American’s credit rating will be used repeatedly by each Party as evidence that the other should be voted out of office in 2012. 

It will be important, therefore, that each of us remembers the facts and speaks up whenever liberties with them are taken.

For more information

6 comments:

  1. Very nicely approached, well-written and an astute take on our current dilemma. Your culmination: "The medium-and-long term debt and deficit need to be reduced. (Note that S&P said nothing opposed to additional near-term stimulus spending to address the current weak economy.) And civility will have to be restored to Washington." is the best I've seen in the time since the announcement. Thank you very much.

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  2. Excellent!! Thanks so much!

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  3. Thank you Sandy! Very enlightening.

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  4. Thanks, Sparker. The reaction by the Republicans and Democrats reminds me of Tweedledee and Tweedledum in Alice in Wonderland, each pointing to the other to find fault, yet ignoring the real problem. Will the future show improvement or a worsening of out fiscal predicament?

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  5. As common sense as it gets - thanks for that.

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  6. There is more to the debt downgrade than meets the eye: http://narcosphere.narconews.com/notebook/bill-conroy/2011/08/us-debt-downgrade-may-have-chinese-connection

    Follow the money.

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