August 10 2011

Our Long-Term Debt--Not the Tea Party--Is the Reason for the Downgrade

Carrie L. Lukas

I wrote recently about how the real cause of the S&P downgrade was our train-wreck entitlement programs-since they are driver of our long-term debt problem.

A commenter had a different take:

Carrie Lucas did you notice your nose growing longer while you were writing the faleshoods that are in your article? What the S & P cited as the number one reason for the downgrade is the intransigent behavior of the tea-party/GOP. So either you are being intentionally deceitful or you have tragically poor comprehension skills. S & P blamed the willingness, maybe even eagerness, of some politicians (do you know how to spell GOP and tea-party) to default rather than pay the nation's bills. The S & P also did note that the country is spending too much money but did not question America's ability to pay its' bills, rather S & P blamed the politicians who were publicly saying, both in words and actions, that they would rather default than pay the nation's bills. Those politicians are the tea-party/GOP. This was definitely a tea-party/GOP downgrade.

I feel confident my nose looks pretty much the same as always, but let's look at the language that the S&P actually used when issuing the downgrade and see who is telling "falsehoods" shall we?

We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

We have also removed both the short- and long-term ratings from CreditWatch negative.

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.

The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

You can read more from the S&P here. And the whole thing should really be required reading. 

Yes, at one point the S&P expresses concern that "The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy."But their concern wasn't that Congress wasn't going to act quickly enough to raise our debt ceiling and end up in actual default. The S&P's concern-and it's a legitimate one-is that our political system isn't up to the task of "fiscal consolidation," and particularly doesn't seem capable of tackling "entitlements." In the end, S&P warns that if the government doesn't cut spending and government debt increases more, another downgrade could be in the offing.

Needless to say there is nothing in there about the Tea Party. It's all about the long-term fiscal imbalance and a political system that is incapable of addressing those problems seriously.

Those, like the man who left the comment on my post, who desperately want to pin the downgrade on the Tea Party should also remember that it was the President who said he would veto any debt ceiling increase that didn't get him through the next election.

Some Tea Partiers may have been willing to take the country "to the brink" in the cause of forcing more meaningful, comprehensive changes to government's run-away spending. But the President was willing to do it simply for the cause of his re-election. He wasn't acting on principle, but just in naked political interest, because he doesn't want to have the country focus again on our ballooning national debt and his failure--yes, complete, absolute, comprehensive, top-to-bottom failure--to offer any plan at all for how to bring our debt down.

The President has made a couple of speeches about the need for a "balanced" approach and to raise taxes on the rich. Fine. He wants to jack up taxes to cover the shortfall. I disagree, but it's certainly a legitimate point-of-view.

But where's the plan? Let's see it on paper. Just how high does he want taxes to go? Just how much money will this raise? No one knows, because the President hasn't offered anything concrete. It's pure political positioning.

Those who want to pretend this is all about the debt ceiling and the unwillingness of Congress to rubber-stamp higher levels of borrowing are fooling themselves. Our problems are far more severe. We have an enormous, growing debt and broken entitlement programs with trillions in unfunded liabilities. What's worse, we have political leadership-particularly a President-that is entirely unwilling to talk about solutions.

But this debate about what's the real cause of the downgrade will be settled in the not too-distant future, when the U.S. is downgraded again. We will know then it has nothing to do with anyone's unwillingness to raise the debt limit.

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