More than that, however, the rationales given by S&P for the downgrade are much less about economics than about politics, and the politics of the situation have already been known for quite some time.
On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.On the other hand, it?s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?
Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point ? then went ahead with the downgrade.
I think the $2 trillion math error on S&P's part speaks both to how shallow their economic analysis actually was and to how committed they were to the political rationales behind their decision, regardless of any actual numbers. Repeatedly, the S&P statement referred not to the actual ability of the U.S. to pay its debts, which it seemed to leave unquestioned, but the political environment surrounding those debts. They specifically cited the "brinksmanship" of the debt ceiling as their prime motivation:
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. [...]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.
There's certainly no getting around the premise that playing "political brinksmanship" with U.S. faith and credit would, almost by definition, begin to make people question the government's true commitment to that faith and credit. That, indeed, is exactly what critics of the GOP move to hold the debt ceiling hostage were warning of, and why many of us were convinced that even a drawn-out battle now to block future use of that hostage would be far preferable to a scenario in which all debt decisions going forward are similarly ransomed. It is dangerous precedent, and S&P in its statement is declaring that a new market uncertainty now exists over exactly that. It would be hard pressed to do otherwise, after statements by GOP leaders such as Mitch McConnell that future debt ceilings would be held hostage in the same fashion.
In another bit of speculative political analysis, but one that has more substantive numerical implications, S&P altered its previous calculations of future U.S. debt to reflect the new apparent realities of Washington. It presumes the Bush tax cuts will indeed be further extended and made permanent:
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.
This, obviously, has profound effects on the size of future U.S. debts, as it represents a very large chunk of them. If you presume the Bush tax cuts will never expire as intended, the deficit indeed explodes. Once again, this was a fiscal impact readily warned about by?well, I believe nearly everyone, as it turns out.
Parsing the S&P statement from a partisan standpoint, there are a few things to note. As cited above, the Bush tax cuts appear to be the only non-entitlement-related government policy specifically called out by S&P in their rationale for downgrade, and "Republicans in Congress" were specifically called out for "continu[ing] to resist any measure that would raise revenues." It seems S&P comes down squarely on the side of believing revenues do need to be increased, though it pointedly shies away from suggesting any numbers.
Couple this with their plain and prominent citation of debt ceiling hostage-taking as a prime reason for the downgrade, and it would be difficult to argue any position other than that S&P is blaming recent GOP actions directly for their downgrade decision.
The other conservative side is, naturally, choosing instead to focus exclusively on S&P's concern over growing entitlement programs, ignoring their calls for revenue and against ransoming U.S. debt obligations. S&P makes no recommendations as to those entitlement programs other than the generic demand that they cost less, however, and Democrats and progressives have no dearth of simple solutions that do in fact cut the costs of those programs. Most are unpalatable to Republicans, as they involve either decreased corporate power or, worse, increased taxes on the wealthy, but single payer healthcare would have saved a fortune, as would increased government bargaining powers for medication, and Social Security can be largely "saved" with revenue-side alterations, as dull and unexciting a solution as that sounds. Note that the United States made much progress in solving the deficit problem during the Clinton years, only to have it explode again under Bush. This implies that the problem is not in fact intractable, but can and is altered quite dramatically by effective or ineffective short-term decision making.
So from a partisan standpoint, Obama comes out looking far, far better than the Republicans in the S&P analysis. Not that he is entirely without fault, mind you: It was his decisions that led to "compromise" on both the Bush tax cuts and the threat of future debt ceiling hostage-taking, and one could readily argue that his willingness to capitulate on both points, rather than standing firm, led to the downgrade. But Republicans, upon any rational reading of the document, get the far worse end of the stick.
There is one particular element of the downgrade that I find inexplicable. During all the years of the Bush presidency, when the deficit was indeed ballooning, there was little serious talk of a downgrade of U.S. credit. When the Bush tax cuts were actually enacted, and when the recession hit, inflating the deficit even more substantially?none of that was worth a credit downgrade. This was all especially pernicious because if you remember, the GOP position at the time was that "deficits didn't matter"?an explicit statement that they weren't even interested in contemplating the deficit, much less repairing it. How, then, did those statements not rattle the credit markets and credit agencies?
On the contrary: when America suddenly does decide that the deficit is indeed worth reducing, then the credit agencies begin to quiver, and when a demanded $4 trillion cut in the deficit becomes a mere $2 trillion, S&P only then finds the situation untenable. That seems insincere, at best. S&P will argue (did argue, in fact) that it is because the new political conditions in Washington currently make rational economic decision-making impossible, and that is certainly a recognizable argument, but it is also a tendentious one, when talking about long term deficit prospects. Yes, the current situation is a mess, and it might even be catastrophic if continued indefinitely: but the Bush years, in which deficits were run up willy-nilly, had the same irresponsible flavor.
In the end, even though the S&P analysis has much fodder for partisans on our side, I am still inclined to believe Krugman's interpretation: the actual downgrade decision is largely tripe. It may be more significant as a publicity stunt for the S&P officers involved than for any actual economic analysis (when you make math errors in the trillions-of-dollars range, it indicates that math did not much factor into your decisions) and if S&P is relying on mere political supposition in order to make those decisions, then it is not clear what analysis they are offering that the markets do not already know.
Economically speaking, there are currently no shortage of takers for U.S. bonds. Whatever S&P thinks, the actual market seems to be quite confident that U.S. debt is one of the safest things in the world to invest in. Whether the downgrade will raise interest rates on that debt even marginally, therefore, is dubious, although if the situation continues to deteriorate, that would likely change.
Politically speaking, the effects will be much larger, in large part because further intransigence in Washington could very well lead to other ratings companies making the same judgments or, more likely still, the wider markets making those judgments on their own. The political stances of the parties are now more likely to directly cause economic side effects, in other words, because of the now much-increased scrutiny of those stances. The problem with elevating economic anarchy in government, in the form of hostage taking and the like, is that the instability it creates does in fact have real world effects in consumer and market confidence: it is difficult to be optimistic at future U.S. economic prospects if you are convinced that one particular partisan sub-movement is both willing and able to destroy those prospects at will, merely in order to fulfill their own ideological desires.
So in that respect, the S&P does serve as valid warning. If anything, it was a warning that came a bit too late, but perhaps the stature of that particular institution will lend credence to what mere economists and Nobel Prize winners have been saying for a good long time: that sound fiscal policy must take precedence over ideological hissy fits and constant threats of government shutdowns and partial-shutdowns as petty acts of gamesmanship (see: FAA shutdown, etc.)
We can only hope.
No comments:
Post a Comment