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Wonkbook: How Congress provoked Standard & Poor’s

By Ezra Klein,

Spencer Platt GETTY IMAGES NEW YORK, NY - APRIL 18: Traders work on the floor on the New York Stock Exchange on April 18, 2011 in New York City. Following news that Standard and Poor's had cut its long-term outlook on U.S. debt to negative, the Dow Jones industrial average (INDU) fell 180 points in afternoon trading, settling at the close down 140 points. (Photo by Spencer Platt/Getty Images) Here’s what Standard Poor said yesterday: at some point in the nearish future, the United States government is going to need to pass some laws putting us on a better fiscal path. But there’s a good chance that members of the two parties will disagree on what those laws should include, and since Congress’s natural state of existence is paralysis, it’s easy to imagine that we’ll wake up on Jan 1st, 2014, and nothing will have happened. If you seriously think there’s anything surprising, or even unconventional, in that analysis, you should pick up the paper once in awhile. S&P got seriously scooped on this story.

Possibly because the analysis was so obvious, the bond market shrugged the announcement off with little trouble. The rating agency’s concerns were treated with somewhat more urgency in Washington, where politicians of both parties rushed to the cameras to warn that the only way to keep S&P from downgrading our credit at some future date would be for the other party to stop standing in the way of their policy preferences. Not a great strategy if you’re trying to convince the S&P that you really can come to some future agreement.

But that’s par for the course with Congress, which seems to be doing everything in its power to undercut the market’s opinion of America. Consider health-care reform. Like it or hate it, it included a bevy of Medicare cuts and reform and related cost control experiments. Republicans could have announced they were going to repeal everything but these. Instead, they attacked them ferociously, saying they were either too cruel or too unsustainable...right up until Paul Ryan decided to keep most of them in his budget. How much the better for America’s fiscal reputation if both parties had just agreed to celebrate a first step on containing health-care costs from the beginning and argue over the parts where they actually disagreed.

The same goes for the budget negotiations. Viewed from one direction, Democrats have come quite far on spending cuts -- they’ve accepted freezes on both defense and non-defense discretionary, cuts to various mandatory reforms, and cuts to Medicare, not to mention making peace with the idea of moving from stimulus to deficit reduction despite 8.8 percent unemployment -- while many Republicans have quietly admitted that the final deal will raise revenues by closing down tax expenditures. The president’s proposal, in fact, looks very similar to the Simpson-Bowles recommendations, which many saw as a good bipartisan starting point just a few months ago. Cheering, right?

Unfortunately, Democrats began the year by convincing everyone they weren’t going to produce a deficit reduction plan and Republicans, rather than stepping into the vacuum with something sensible, insisted that deficit reduction must also privatize Medicare and block grant Medicaid, though they know that both ideas are nonstarters so long as Democrats hold the Senate and the White House, and probably so long as Democrats exist in American politics at all.

It’s easy to imagine world in which everyone holds the very same opinions they do now but the market is purring contentedly over our aggressive, serious approach to deficit reduction. That we don’t live in that world is almost 100 percent the fault of Congress, which pretends to be concerned about the market growing wary of our debt but does everything in its power to scare, rather than reassure, investors about our ability to pay it back.

Five in the morning

1) Standard Poor’s is considering lowering its rating of US government debt, report Zachary Goldfarb and Lori Montgomery: “The ratings agency Standard and Poor’s warned the United States on Monday that it could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s nearly $14.3 trillion debt. S&P changed its outlook on the United States from ‘stable’ to ‘negative’ and said the federal government could lose its AAA rating if officials fail to bring spending in line with revenues. The AAA rating identifies the United States as one of the world’s safest investments -- and that has helped the nation to borrow at extraordinarily cheap rates to finance its government operations including two wars and an expensive social safety net for retirees.”

2) Democrats think S&P’s announcement proves them right. Republicans think S&P’s announcement proves them right. Felicia Sonmez reports: “Republicans argued that the news illustrates the gravity of the country’s debt crisis and the need for any debt ceiling vote to be accompanied by a plan to tackle the country’s longer-term fiscal problems...Meanwhile, a group of more than 100 House Democrats led by Rep. Peter Welch (D-Vt.) on Monday reiterated its call for a “clean” debt limit vote, or a vote with no conditions attached. In a statement, Welch contended that the New York Stock Exchange’s sharp drop in reaction to the Standard Poor’s ratings change Monday morning could be a harbinger of worse things to come if a political showdown on the debt limit raises doubts about whether the country will fulfill its financial obligations.”

3) But the bond market ignored the news, notes Annie Lowrey. “Stocks sunk on the news, but the bond markets shrugged it off entirely. (Business Insider described the bond rally, not unreasonably, as the ‘Market’s Middle Finger to S&P.’) That might be because the S&P is not telling anyone who trades bonds anything they do not already know: America has a lot of debt and a gridlocked political system. But it also has resources to pay investors back and a healthier economic outlook than some of its peers.”

4) US corporations have been hiring more abroad than domestically, reports David Wessel: “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization’s effect on the U.S. economy. The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That’s a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad. In all, U.S. multinationals employed 21.1 million people at home in 2009 and 10.3 million elsewhere, including increasing numbers of higher-skilled foreign workers.”

5) Not passing a debt limit increase would trigger a new financial crisis, writes Ezra Klein: “To understand the danger posed by the debt ceiling, it helps to understand the financial crisis. A lot of banks and investors held assets based on mortgages they thought were safe. They weren’t. That meant that no one knew how much money they really had, or how much money anyone else really had. So the market did what woodland creatures do when they get confused and scared: It froze. And so, too, did the economy. As the unemployment rate shows, we’re still not completely thawed out. If Congress fails to lift the debt ceiling beyond its current limit of $14.29 trillion -- or even waits too long -- the chain of events will be similar, but the asset under question will be America itself, not some newfangled Frankenstein bond made out of mortgages from the Reno suburbs. Which would mean the aftermath would be much, much worse.”

Mash-up interlude: Xaphoon Jones mixes The Jackson 5’s “I Want You Back” and Passion Pit’s “Sleepyhead”.

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Still to come: Obama’s tax return shows he would pay higher taxes under his plan; Nancy Pelosi could be a major player in the debt-ceiling negotiations; the White House isn’t getting much traction for its upcoming debt summit; medical device makers are fighting a tax in health care reform; union families feel under assault; the budget deal will hamper efforts to fight climate change; and a man irons a shirt in the middle of a highway.


Obama’s IRS filings show he would pay more taxes under his own plan, reports Jackie Calmes: “Income for the Obama household continued to slip in 2010, tax returns show, as proceeds from President Obama’s best-selling books tapered off. But just as he has said, his income is easily high enough to make the family eligible for a tax increase under his own deficit-reduction proposals.”

Nancy Pelosi could be a major player on the debt increase, writes Brian Beutler: “Right now, House Democrats are coalescing around the view that the debt limit should be hiked without major concessions to the GOP attached to it. They want a ‘clean’ increase in the debt ceiling. If House Democrats hold to that position, they’ll force House Republicans to pass a debt limit hike with only Republican votes. What the conservative base of the party would demand under those circumstances is unclear, but there’s a high likelihood it would reach way too far, and be a non-starter in the Senate and with the White House. That’s where Boehner would get stuck. He knows the debt limit needs to be lifted. He knows that to get a debt limit bill through the Senate, he needs Democratic buy in. And if Pelosi and her leadership team keep Democrats aligned, he knows that means ditching just about all the concessions Republicans want.”

Members of Congress aren’t enthusiastic about the White House’s upcoming debt summit, reports Jackie Calmes: “Vice President Joseph R. Biden Jr. on May 5 will host the first meeting on deficit reduction with members of Congress since President Obama last week called for a bipartisan group to start negotiating an austerity plan, the White House announced late on Monday. One problem, though: The Republican House and Senate leaders have not named their negotiators and show little inclination to do so. The Democratic leaders were hardly more enthusiastic in announcing their designees over the weekend... The Democratic leaders, Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, have each named two members for the deficit-reduction talks instead of the four that Mr. Obama wants.”

A new study suggests Dodd-Frank could have reduced the cost of Lehman Bros.’ failure, reports Meera Louis: “The Dodd-Frank Act would have enabled an orderly unwinding of Lehman Brothers Holdings Inc. that would have averted major losses by creditors and taxpayers, the Federal Deposit Insurance Corp. said in a report. If the FDIC had been able to initiate a prompt structured sale of Lehman in 2008, general unsecured creditors could have recovered 97 cents on every $1 of claims, compared with 21 cents estimated in the most recent bankruptcy reorganization plan, according to the paper released today in the FDIC Quarterly. Dodd-Frank, the financial regulatory overhaul signed into law by President Barack Obama in July, expands the agency’s longstanding authority to wind down deposit-taking institutions to any firm whose failure is deemed a threat to the financial system.”

The normally mild-mannered Alan Blinder does not like Paul Ryan’s budget: “The Ryan plan has received vastly too much praise from people who should know better. For a while, it was even celebrated as “the only game in town,” which it never was. It was preceded by both the Bowles-Simpson and Domenici-Rivlin plans, which are vastly superior in every respect. Within days of Mr. Ryan’s announcement, President Obama chimed in with his own ideas on deficit reduction—another huge improvement over the Ryan plan. Now we await the Senate Gang of Six’s entry. No, the House Republican plan is not the only game in town. It’s only the worst.”

The Office of the Comptroller of the Currency has fallen down on its duties as a regulator, writes Joe Nocera: “Calling the Office of the Comptroller of the Currency a ‘regulator’ is almost laughable. The Environmental Protection Agency is a regulator. The O.C.C. is a coddler, a protector, an outright enabler of the institutions it oversees... it is doing its darndest to make sure the banks escape the foreclosure crisis -- a crisis they created with their sloppy, callous and often illegal practices -- with no serious consequences. There is really no other way to explain the “settlement” it announced last week with 14 of the biggest mortgage servicers (which includes all the big banks)...If you’re wondering what the consequences will be if the banks don’t abide by the terms, the answer is: there aren’t any.”

Adorable animals being hygienic interlude: A baby racoon takes a bath.

Health Care

The medical device industry is lobbying hard to repeal a tax in health care reform, reports Joe Eaton: “Like many other interest groups, the medical device industry met with White House officials in the run-up to the health care battle in Congress. But while insurers, pharmaceutical firms and even the American Medical Association made agreements trading their support for specific concessions, the device makers were not able to close a similar deal. As a result, the final health care reform bill included a 2.3 percent excise tax on device makers that’s expected to produce $20 billion over a decade to help pay for expanded health coverage...Medical device makers are showering cash on friends in Congress and working the halls, hoping that one of five bills that would overturn the excise tax might actually make it into law.”

Score another one for the V.A: “A vigorous quality-improvement program at more than 150 Veterans Affairs hospitals has achieved remarkable results controlling infections over the past several years. It reduced the spread of one of the most deadly bacterial infections, known as MRSA, by 62 percent in intensive care units and 45 percent in other hospital units. If other hospitals could replicate the effort, thousands of patients might be saved from needless infections acquired after they entered the hospital.”

Domestic Policy

Union families feel under assault, reports Amy Gardner: “Judy and Jim Embree, an operating room nurse and paramedic and firefighter, were attending a rally at the state Capitol when they discovered that everything they thought to be good and right about their lives was, to an alarming number of people, completely wrong. The people who showed up that day in support of a plan, since adopted, to cut the power and benefits of public-sector unions said that people like them were the problem. That their ‘high wages’ and ‘exorbitant pensions’ were crippling cities and counties across Ohio. Some, even, said their jobs were unnecessary. It had never occurred to the Embrees that firefighters and nurses could be unnecessary. They thought of themselves as linchpins of the community -- and one of the biggest rewards of their jobs was knowing that the rest of the world thought so, too.”

Voucher programs are dying off due to poor results, writes Pema Levy: “One of the reasons conservatives have had to modify their hard-line stance on vouchers is that they’ve been successful in installing voucher programs across the country, which means we actually have hard evidence showing that they don’t work very well. Underwhelming studies of voucher programs have damaged their reputation, even among conservatives prone to liking them. The first incarnation of D.C.’s voucher program came with an evaluation requirement, and the Department of Education produced detailed reports on the program’s success -- or lack thereof. The final report found ‘no conclusive evidence that the OSP affected student achievement overall.’”

Extreme sport interlude: A man engages in “Extreme Ironing” on a British highway.


The budget deal will hamper the EPA’s climate change efforts, reports Katie Galbraith: “The budget of the U.S. Environmental Protection Agency was cut $1.6 billion -- 16 percent -- for the rest of this fiscal year, under the bill that President Barack Obama signed Friday...Some cuts will affect climate-related programs. S. William Becker, the executive director of the National Association of Clean Air Agencies, which represents state and local government regulators, said that states would receive $25 million less than the Obama administration had sought for the remainder of this fiscal year to implement the administration’s greenhouse gas programs. The E.P.A. began to regulate emissions of the gases in a limited way in January, and it plans to phase in additional requirements over time.”

A study questioning natural gas’ climate benefits is spurring debate:

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

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