It is true that the downgrading of the U.S. credit rating by Standard & Poor’s is a wake-up call to Congress to get serious about the federal budget — as if they needed more evidence that their recent efforts have been pathetic. However, the rating must be kept in perspective.
First, the downgrade, from AAA to AA+, doesn’t mean the U.S. can’t pay its bills. Rather, the S&P made it abundantly clear that the ratings decline was due to the agency’s skepticism about Congress, not the U.S. economy.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the [Obama] Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P wrote in a statement last week.
In April, the agency warned that it was considering a credit downgrade, the first in the nation’s history. The situation in Washington has only gotten worse.
“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,” S&P said.
Sen. Olympia Snowe was more blunt during a visit with the Bangor Daily News on Monday. The lack of progress in Congress “doesn’t match the gravity of the times,” she said.
She points out that Congress and the president had months to craft a deal to raise the debt ceiling. A bipartisan commission offered a reasonable plan last December which mixed spending cuts with tax change. Instead, a deal only came at the 11th hour. The same was true with a spending resolution to avoid a government shutdown earlier this year. And, of course, Republicans — who were vocal with their concerns with spending and the deficit — could have done something when they controlled Congress and the White House, but instead voted repeatedly to raise the debt ceiling.
Frustration with Congress’ lack of seriousness was echoed by prominent economists who came to Grand Lake Stream for a fishing getaway last week.
“This is a sad day for the United States when the political machinations of the morons in Washington — with the House and the Senate, Democrats and Republicans equally accountable and guilty — bring the United States of America to the point where a rating agency takes away our AAA designation,” said David Kotok, who is with Cumberland Advisors of Sarasota, Fla., and the organizer of the annual economist retreat at Leen’s Lodge.
“That did not happen because we lack the ability to pay,” he said. “That happened because of 535 members of Congress who failed their constituents.”
Another Grand Lake visitor, Barry Ritzholtz, CEO of FusionIQ in New York and the man behind the influential “Big Picture” financial blog, pointed out that Japan has had a lower rating than the U.S. for years.
And what of the integrity of S&P ratings anyway? Mr. Ritzholtz pointed out that S&P and other credit agencies helped create the real estate lending debacle that triggered the global recession. Now that agency is downgrading the U.S. credit rating.
The agencies gave AAA ratings to mortgage securities that later became worthless. S&P also maintained its top rating of Lehman Brothers, the larger investment firm, as the company collapsed.
“So these people are now pronouncing on the creditworthiness of the United States of America?” economist and New York Times columnist Paul Krugman asked Sunday.
So, is the S&P any more accurate now? Time will tell.
This is not to say the U.S. doesn’t have serious financial concerns. The national debt is too high. Government spending needs to be cut — in thoughtful ways, not across-the-board or through a balanced budget amendment. Entitlement spending needs to be reduced. And the tax system needs to be reformed well beyond eliminating tax breaks for corporate jets.
The most disheartening part of the S&P downgrade memo is its lack of faith in Congress, a sentiment shared by the public. It is Congress’ job to write budgets for the federal government. If they don’t do this job — which they haven’t for nearly three years — no one else can step in and take over the task. It simply doesn’t get done and the public suffers through huge drops in the stock market which, at least temporarily, wipe out large portions of retirement savings — and likely increases in interest rates — which will make mortgages more expensive.
It didn’t take a ruling for S&P, which may or may not be accurate, to show that the U.S. economy needs a lot of work. The downgrade and the market drop must convince lawmakers that, when they return to Washington, they must tackle these serious problems and come up with real solutions, not just plans to put off the hard work for a few more years.