The Standard and Poor’s report came out today, and, as expected, America’s bond rating was lowered from AAA to AA+—moving us from the “good neighborhood” inhabited by Canada, the United Kingdom, and France and placing us in the company of Bermuda, Abu Dhabi, and Slovenia. The likely result of this move is that the United States will pay higher interest rates for future bond debt, making it all the more difficult to dig out of the hole we are now in.
The eight-page report from Standard & Poor’s assigns plenty of responsibility to all of the parties involved in last month’s debt dispute. Interested readers can find reasons to be angry with Congress, the Obama Administration, Republicans, Democrats, and Tea Partiers. Honest readers will find plenty of reasons to blame themselves, their consumption patterns, and their political assumptions for, not only the downgrade, but for the thirty-year history of overspending that brought us to this position in the first place.
However, while the report faults the actions of all of the players in the recent crisis, it does not fault them equally. The report makes very clear that the behavior of one faction bears more responsibility for today’s decision than that of the others. I do not offer this as an opinion, but as a straightforward reading of a report that makes no effort to pull its punches.
The first thing that the report makes clear is that the size of the debt alone is NOT responsible for the downgrade. America’s current debt-to-equity ratio of 74% is lower than that of other nations with a AAA rating, such as the U.K. (80%) and will remain so through 2015. At that point, however, the ratings agency feels that the debts of other AAA countries will begin to decline. They do not believe that this will happen in America. Understanding why is key to understanding today’s action. We need not look too far for the answer, however, as it is in the first-paragraph of the report:
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.
Standard & Poor’s, in other words, downgraded America’s credit rating because they do not trust our political process to reach the compromises necessary to reduce the debt—compromises that will require both “containing the growth in public spending” AND “reaching an agreement on raising revenues.”
Taxes come up again in the report explaining that the projections behind today's decision was influenced by the perception that the Bush tax cuts would continue indefinitely:
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, a position we believe Congress reinforced by passing the act.
Finally, the report makes absolutely clear that its decision was influenced by the actions of those in Congress who openly threatened to allow a default if their demands for spending cuts, with no tax increases, were not met:
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.
This is as direct a statement as S & P could have made against the arrogant, irresponsible way that the once-uncontroversial debt ceiling issue was turned into a hostage situation by a group of legislators determined to press one way of addressing the debt (entitlement cuts) while steadfastly refusing to consider the other (tax increases).
Democrats are certainly not blameless in this mess. The entitlement programs that they love are breaking the country, and, if they can’t find ways to get those programs under control, there is probably no way that we will ever make a significant dent in our bonded indebtedness.
That said, however, the Standard & Poor’s report makes it very clear that the size of the debt is only one of the reasons for the downgrade, and not, at the current historical moment, even the most important one. It is the state of our political process, more than the size of our debt, that produced today’s action. With that in mind, consider that
• Only one of the parties in the recent dispute turned “the statutory debt ceiling and the threat of default” into “political bargaining chips in the debate over fiscal policy.”
• Only one of the parties “continue[s] to resist any measure that would raise revenues.”
• Only one of the parties signaled an absolute unwillingness to compromise its position and bragged to the media that it “got 98% of what we wanted.”
So let the blames begin—there is certainly plenty to go around. But let us not fall for the comforting fiction that, because everybody is at fault, everybody is equally at fault. That is simply not the case, and no serious reading of the actual text of the Standard & Poor’s report could argue that it is.
