Thanks for the kick in the pants, Standard & Poor’s! The unprecedented downgrade of the United States and the harsh critique of the hostage-taking that lead to a better-than-nothing deal to raise the debt ceiling just might be what Washington needed. Maybe now the grown-ups on both ends of Pennsylvania Avenue, particularly those on Capitol Hill, will actually show some leadership. Republicans, particularly the lock-step ideological robots who show mindless allegiance to pledges and who think compromise is surrender, need to acquaint themselves with the responsibilities of governing. And Democrats, particularly those on the hard left, must not be as intransigent on entitlement reform as the GOP is on raising revenues. Tough decisions will have to be made sooner or later, and the ugly fight over the debt ceiling showed that later is already upon us.
The S&P downgrade of the United States should not have come as a surprise to anyone. The rating agency had been issuing warnings for months. It was concerned about the inability of the White House and Congress to come to an agreement to raise the debt ceiling with a credible debt-reduction plan that would put the nation on a more sound fiscal footing. It even told Washington what it would take to keep what was once thought unthinkable from happening — $4 trillion in cuts over 10 years. So when lawmakers walked the full faith and credit of the United States to the precipice only to raise the debt ceiling through a $2.1 trillion spending-reduction deal with most of the cuts being decided by a bipartisan “super-committee” under threat of across-the-board cuts, S&P had no choice but to act.
Folks are none too pleased with the action taken by S&P, and I’m neither moved nor persuaded by two understandable slams against the rating agency.
One slam asks why we should even pay attention to the S&Ps of the world since they shot their credibility to hell by giving AAA ratings to the junk that nearly brought down world financial markets in 2008. It’s a good question. But until said credit agencies are stripped of their importance, their evaluations will remain a key cog in the wheel of global finance. The United States may still be an economic superpower, but it still must live by the same rules as everyone else. And while S&P might be overcompensating for its missteps in 2008, is it fair not to wonder whether Moody’s and Fitch will knuckle under to pressure to hold the United States at AAA? Moody’s has put the rating on negative watch. Fitch says it’s “crunching the numbers” and will render its verdict within a month. While no one knows for sure how the S&P downgrade will impact finances from Wall Street to Main Street, it is probably safe to say that a downgrade from Fitch won’t go over so well.
Then there’s the slam against S&P and its $2 trillion mathematical error. The Obama administration caught it. S&P copped to it. And Treasury is right to push back against what it views as a flawed assessment. That being said, the mistake doesn’t render illegitimate the concern about the stability of U.S. finances or concern that Washington is incapable of making tough decisions without a gun to its head. This is where S&P’s blunt assessment of our political system and the debt-ceiling debacle was right on the mark.
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. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.
“S&P’s decision . . . wasn’t a judgment of our economy or our ability to meet our obligations, it was an indictment of our dysfunctional political system,” said Ryan McConaghy, who heads the economic program at the centrist think tank Third Way. “There’s a direct line to S&P’s downgrade from the unwillingness of Republicans to consider tax increases, resistance on the left to responsible entitlement reform, and particularly the Tea Party’s willingness to threaten the full faith and credit of the U.S. as a negotiating tactic.”
“Why we would take partisanship to the brink, resulting in these self-inflicted wounds, I’ll never fathom,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, about the downgrade. “Hopefully, it is the necessary push to help the super-committee go big and exceed its mission and expectations by coming up with [a] real deal that does major entitlement and tax reform.”
But the only way it can “go big,” as MacGuineas says, is if congressional leaders do what McConaghy and others have urged. Fill the seats not with six Republicans who would block efforts to raise revenue and six Democrats who wouldn’t be open to changes in entitlements, but with 12 lawmakers who will put their country first. If the super-committee is defanged before it gets to work and/or the trigger is activated, we shouldn’t be surprised by the next kick in the pants.