Saturday, August 6, 2011

S&P Lowers US Credit Rating: Blames Deficit and Messy Debt Politics

Standard & Poor's has lowered the US credit rating for the first time in 70 years. The US rating is now AA+ (down from AAA). Economists are not sure how badly (if at all) the negative rating will impact the US economy. Though lowered, the US credit rating only falls below the ratings of 12 other nations.

Blame the Deficit and No New Taxes

The Wall Street Journal provides several reasons for the downgrade. Prior to the debt negotiations, S&P had warned the US to reduce its budget deficit by four trillion dollars over the next ten years. Congress, however, only agreed to cut spending in the amount of 2.4 trillion dollars. Furthermore, Republicans adamantly opposed any deal that would result in tax increases. President Obama conceded the tax issue, even though S&P had already warned the government that anything smaller than a four trillion dollar reduction in the deficit would likely lead to a lowering of the US credit rating.

This news should vindicate progressives and other critics who believe that Congress should have included revenue measures in the debt deal. High levels of spending and dramatically lower tax revenue have combined to create the historically large deficit. Focusing only on spending could not prevent a reduction of the US credit rating.

Tea Party Politics

S&P also commented on the messy nature of US politics as a reason for the downgrade. In language that is often reserved for parts of the world experiencing major political unrest, S&P blamed the "weakened 'effectiveness, stability, and predictability' of U.S. policy making and political institutions at a time when challenges are mounting" for the rating reduction.

Although the Wall Street Journal does not indicate that S&P specifically mentions the Tea Party Republicans (Teapublicans) in its commentary, the behavior of extremists in Congress received much criticism during and after the debt negotiations. Members of the Republican caucus, particularly House Republicans, refused to negotiate with flexibility, and they foolishly insisted that taxes remain "off the table." This rigid position, combined with a very selfish and callous negotiating style has contributed to a reduction in the US credit. S&P had already warned the government to reduce the deficit by four trillion dollars. Reckless politics by the Republicans (and lack of stamina by Democrats) forced S&P's hand.

Fortunately, S&P commentary will not allow the media to blame US spending alone for the reduction -- although many sloppy or deceptive reporters will likely do so. Instead, both spending and a failure to raise revenue are responsible.

UPDATE

In a formal statement, S&P says that it "takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate." Nonetheless, it also concludes that in order to be effective, a deficit-reduction plan must have support from both both political parties and from the public. S&P also acknowledges that only the Republican plan disfavors tax increases and would reduce the deficit solely by cutting social programs -- and not defense.

Democrats will largely oppose a deficit-reduction plan that does not include tax increases. The public will not favor slashing Medicare and Social Security in order to preserve defense spending and tax cuts for wealthy Americans. Only Republicans would favor such an approach. The S&P position, though not formally stated, is abundantly clear.

UPDATE

The Obama Administration has criticized S&P for the downgrade. Apparently, the agency's math was off by two trillion dollars. US officials notified the agency of its error prior to the announcement of the downgrade, but it said that the downgrade should occur notwithstanding its erroneous math. Perhaps this means that the dramatic political situation in the country weighed very heavily on S&P's decision.

2 comments:

HiPPi said...

President: Let's take a balanced approach focusing on spending and revenue increases.

Polls: American people support a balanced approach focusing on spending and revenue increases.

S&P: We downgraded you because some of your politicians are insane and you didn't take a balanced approach focusing on spending and revenue increases.

Strict conservative politicians: In no way will we vote for a balanced approach that has any revenue increases; but we plan on blaming all of those who did for the downgrade and then expect you to vote for us instead of them.

Darren Lenard Hutchinson said...

Niki -- brilliant summation!

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