On Friday evening, Standard & Poor’s downgraded the U.S. bond rating. The Post reported:
Standard & Poor’s announced Friday night that it has downgraded the U.S. credit rating for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.
Lowering the nation’s rating to one notch below AAA, the credit rating company said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future. . . .
The decision came after a day of furious back-and-forth debate between the Obama administration and S&P. Treasury Department officials fought back hard, arguing that the firm’s political analysis was flawed and that it had made a numerical error in a draft of its downgrade report that overstated the deficit over 10 years by $2 trillion. Officials had reviewed the draft earlier in the day.
“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said Friday night.
True, it doesn’t speak well of a ratings agency, one of many that helped perpetuate the housing boom and the ensuing financial crisis. And it remains to be seen what impact it will have when the markets open. (Treasuries are still a safer bet than European debt, or for that matter, U.S. and foreign stock markets). Still this is potentially a tipping point, at least, politically.
Matt McDonald, a former Bush administration official and consultant for McKinsey & Co. who now provides communications and business strategy advice, tells me that the economic reaction may not be as severe as some anticipate. “We’ll find out shortly, but it wouldn’t shock me if the markets brush it off on some level. I think people in finance are more concerned about the current state of the economy than our ability to pay interest in 15 years (which also by definition is fine — we can print money).” However, the political ramifications, he says, may actually be more acute. “I think politically it’s a big deal. It really hurts the President, especially among independents. It resonates with voters. They have been thinking that spending in Washington is out of control, and this confirms it in a big way that they can intuitively understand. The White House will try to blame every Republican in or out of office, but at the end of the day I don’t see how the President isn’t held accountable for this. The best they can hope for is to spread the blame.”
But this, of course, is the Keynesian comeuppance. Spend more! Prime the pump again! Well, the Democrats and the president now see that Keynesian stimulus is not only ineffective but self-defeating. You can’t borrow forever.
Economist Douglas Holtz-Eakin (economic adviser to the McCain 2008 presidential campaign) cautions that we don’t have an S&P problem; we have a debt problem. He e-mailed me that the move by S&P “will put other raters (Moody’s, Fitch) on notice to watch carefully and raise pressure on the select committee” set up by the debt-ceiling deal. However, the bigger issue “is the real debt problem; not the rating,” he wrote.
There is no denying, as much as the Democrats and their pundit allies try to point fingers: It is Obamanomics (huge spending, skyrocketing debt, mega-regulation) that got us to where we are.
As Byron York observes:
After beginning with a Clinton-era surplus in 2001, the Bush administration ran up deficits of $158 billion in 2002; $378 billion in 2003; and $413 billion in 2004. Then, with revenues pouring in, the deficits began to fall: $318 billion in 2005; $248 billion in 2006; and $161 billion in 2007. That 2007 deficit, with the tax cuts in effect, was one-tenth of today’s $1.6 trillion deficit.
Deficits went up in 2008 with the beginning of the economic downturn — and, not coincidentally, with the first full year of a Democratic House and Senate.
Finally, there’s the national debt. When Bush took office in January 2001, the debt was about $5.7 trillion, according to Treasury Department figures. When Bush was sworn in for his second term in January 2005, the debt stood at about $7.6 trillion. When Bush left office in January 2009, the debt was $10.6 trillion. He had increased the national debt almost $2 trillion in his first term and $3 trillion in his second, for a total increase of nearly $5 trillion over both terms. (Of that $3 trillion increase in Bush’s second term, $2 trillion came under a Democratic Congress.)
The debt stood at $10.6 trillion when Barack Obama took office in January 2009. Now, it’s about $14.4 trillion. The president has increased the national debt nearly $4 trillion in his first two and a half years in office. By the time Obama finishes his first term, he will have increased the national debt by somewhere in the $5 trillion-to-$6 trillion range — more than Bush did in two terms.
The Obamanomics Kool-Aid drinkers will say that Obama had to spend so much to get us out of the recession. But wait. Now we have huge debt AND a recession. Sort of like what the conservative critics predicted all along.