S&P Speaks

The main issue driving the downgrade appears to be lack of faith in the political parties to act responsibly and compromise over entitlements and revenues.

Via CBS News:  S & P statement on U.S. debt downgrade

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Emphases mine.

Ok, so not surprisingly, the ridiculous down-to-the-wire fight over the debt ceiling part of the mix here.  My initial reaction upon hearing the news about the bond rating downgrade was that the whole debt ceiling debacle was at the root of the decision for S&P to make a move and this statement appears to support that assessment.

I think this is especially true because the statement also hones in on two factors:  entitlement spending and revenues.  Both of these issues are central to any long-term fiscal stabilization and yet these are issues that appear unapproachable at the moment, especially revenues (given that the Republicans seem to be dedicated to the Grover Norquist approach to revenues—i.e., none can be raised).  Entitlement are also an extremely hard nut to crack as large number of Congressional Democrats are unwilling to engage the topic (although in fairness, President Obama appeared willing to seriously discuss entitlement reform with his “Grand Bargain” approach that was DOA because it included tax increases).

What S&P appears to be saying is that it does not see a Congress willing to make hard choices but instead one that appears willing to play chicken with the full faith and credit of the United States of America.  Given all of that, I suppose the move is understandable.

Back to the statement:

The political brinksmanship of recent months highlights what we see as America’s governance and policy making 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.

I think it is important to see here that the issue is not the debt, per se, but it is the political climate because it makes it difficult to see how reasonable policy can be made to deal with the fiscal issues.

And again, entitlement and revenues are central to the decision:

It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

[…]

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

I think it cannot be stressed enough that while the statement does get into a specific critique of the debt ceiling package (which S&P considers inadequate), that the main driver here appears to be lack of faith in the political parties to be able to reach reasonable policy compromises.

The two parties are going to have to compromise on entitlement reform and on taxes—but it seems unlikely that this is going to happen, especially going into an election year and with a House majority that is heavily influences (if not controlled) by a faction that finds compromise to be anathema.

FILED UNDER: Congress, Deficit and Debt, US Politics
Steven L. Taylor
About Steven L. Taylor
Steven L. Taylor is a Professor of Political Science and a College of Arts and Sciences Dean. His main areas of expertise include parties, elections, and the institutional design of democracies. His most recent book is the co-authored A Different Democracy: American Government in a 31-Country Perspective. He earned his Ph.D. from the University of Texas and his BA from the University of California, Irvine. He has been blogging since 2003 (originally at the now defunct Poliblog). Follow Steven on Twitter

Comments

  1. Jeremy R says:

    You seem to be on the right track. Here it is straight from the horse’s mouth (S&P’s Head of Sovereign Ratings):

    http://www.cnn.com/2011/BUSINESS/08/05/global.economy.cnn/

    John Chambers, the head of sovereign ratings at S&P, told CNN’s Anderson Cooper that the political brinkmanship over the debt ceiling proved to be a key issue, with “the U.S. government getting to the last day before they had cash-management problems.”

    Asked who was to blame, Chambers said, “This is a problem that’s been a long time in the making—well over this administration, the prior administration.”

    Congress should shoulder some of the blame, he said. “The first thing it could have done is to have raised the debt ceiling in a timely manner so that much of this debate had been avoided to begin with, as it had done 60 or 70 times since 1960 without that much debate.”

    Chambers added that his agency’s decision is likely to have a long-term impact. “Once you lose your AAA, it doesn’t usually bounce back,” he said.

    He pointed to the decision by Congress about whether to extend the 2001 and 2003 tax cuts as one crucial area. “If you let them lapse for the high-income earners, that could give you another $950 billion,” he said.

  2. Gulliver says:

    Taylor, you are so transparently full of crap in your take on this it’s pitiful. Read your own quote why don’t you? Your focus on the contentious process portion of S & Ps reasoning completely and intentionally ignores the thrust of their statement.

    the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely

    It is the fact that the growth is not likely to be contained which led to S & Ps downgrade, not the process we went through. Who is the party that thought it controversial to contain the growth? The point of S & Ps statement is obvious (and just as obviously not what you claim it to be) and you are making yourself look ridiculous.

  3. @Gulliver: Perhaps you should do a bit of re-reading.

    The reason that S&P is doubtful about future agreement is, in part, because of the spectacle we just witnesessed.

    I would also suggest reading the entire S&P statement and the link that Jeremy provided above.

  4. ponce says:

    The reason that S&P is doubtful about future agreement is:

    We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

  5. Jeremy R says:

    I watched the video of that Anderson Cooper / S&P Ratings Head interview.

    What bothered me is Chambers seemed to admit Treasury found a $2T error in their baseline calculations, they agreed and corrected it. He tries to downplay the significance by saying it’s only a difference of 1.5% by 2015. But if it’s true S&P would have been satisfied with a $4T deal vs the current ~$2T deal, suddenly a $2T error seems kind of important, and that’s ignoring their somewhat arbitrary removal of another $1T in revenue as they no longer predict a future expiration of the high-end of the 2001/2003 tax cuts.

    Perhaps, in the end, the political dysfunction of using the debt ceiling as a bargaining chip, right up to the last moments, won out.

  6. Anonne says:

    While I agree that our political process is now broken, and irreparably for the foreseeable future, I am not sure the S&P has any moral standing to render judgment. I mean, these are the folks that totally missed the toxicity of derivatives. And there is a solid question of whether or not rating agencies even know how to properly value sovereign debt.

    I agree with a lot of the sentiments, and as investors and as citizens, we should always prefer good policy over good politics, but it takes a measure of good politics to craft good policy. What we are getting is a sh*t sandwich.

  7. OzarkHillbilly says:

    Taylor, you are so transparently full of crap in your take on this it’s pitiful.

    We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

    Gulliver, will you please take your toys and go home?

  8. PD Shaw says:

    I agree with Dan Drezner, S&P appears out of it’s element doing politics, should hire political scientists. Or go back to calculating debt to income ratios.

  9. john personna says:

    @PD Shaw:

    Sorry, that’s just dumb. Bond rating has to include “management:” as a component. Bad management can screw up a potential revenue stream, and force a default. In the case of sovereign bonds, who is management?

    Your position is what, that S&P should not have started publishing The Bond Guide in 1941?

    That it was OK for them to downgrade Argentina, but not us?

  10. PD Shaw says:

    JP, please don’t read my comments; your insults and misreadings have gotten tiresome and I’m trying to return the favor.

  11. Hello World! says:

    Aren’t these the same guys that rated junk bonds as triple A? Well, anyway there is some valuable info in the report about entitlements and revenues. Fine raise the retirement age by 5 years – I’m ok with that in exchange for closing tax loopholes. Unfortunately, we need congress to make that decision.

  12. john personna says:

    @PD Shaw:

    Reply to my content, if you can.

    Bond ratings require judgement of management, yes?

  13. Hey Norm says:

    As much as I feel the Tea Stain has done serious damage to the country… I think S&P is f’ed up. These are the same people who enabled the big banks to almost eviscerate the economy. Now they admit they made mistakes in calculations but don’t care.
    I watched the CNN interview with the S&P guy last night and I think he’s full of shit. Yes, the Republicans never should have taken the debt ceiling hostage, and their intransigence on revenues is ideologically misguided. But the fact is that the debt ceiling was raised in spite of those things. And it’s only the un-informed like Jan that think we are not going to pay our obligations. If S&P has joined that cult then no one should be paying attention to them.

  14. john personna says:

    @Hey Norm:

    I’m not sure that $2T is material. It may be a gotcha and spin by the administration.

    Really, I worry that some people think that AAA is a god-given US right, and that no matter how screwed up our finances become, we should never lose it.

    Is that healthy? Isn’t one ratings agency downgrade a healthy shot across the bow?

  15. john personna says:

    BTW, as I noted in the other thread, there is some confusion about what the downgrade means. The S&P has a long, long, scale. “AA+” is still pretty much at the top.

  16. Hey Norm says:

    @ John Personna….
    If it makes the Super-Committee more serious then it’s a good thing.
    If the interest rate on the refi I’m working on jumps significantly then it’s a bad thing.
    We’ll see.

  17. john personna says:

    I doubt the interest rates will move. I think that is a misunderstanding of which is cart, and which is horse.

    [Update: Though of course a small move would be again, productive. The Bond Vigilantes play a useful role. They did in past decades.]

  18. john personna says:

    Here is an FT Alphaville article I like. It has a link to the full report, and begins:

    It happened. After quite incredible reports of miscalculations, it happened. The thing that is perversely both meaningless and full of meaning was announced on Friday evening New York time. The United States of America is now rated AA+ with negative outlook by Standard & Poor’s.

  19. Jib says:

    I think there is a real possibility that the story here is one of pure corruption on S&P’s part. There is evidence that they leaked the down grade. http://ftalphaville.ft.com/blog/2011/08/05/645016/the-safest-of-havens/

    S&P has a history of this kind of corruption. When their calculations proved to be off, they dropped the math and just went with politics as the reason. But since they had already leaked the info, they HAD to do the down grade this weekend. Otherwise, the positions taken on the leak would not pay off.

    The corruption of the rating agencies lead directly to the crisis in 2008. The govt should have thrown many of the employees of the rating agencies in jail and killed off the companies after the 2008 crisis. This is karma for failing to do so. Hopefully, the result of this will be an investigation into the leak and finally, FINALLY, some one will go to jail for this crap.

  20. john personna says:

    @Jib:

    An SEC investigation would be fair, but don’t be sure that leaks came from S&P alone. By the time they were warning the Administration there had to be many people in the loop.

    Didn’t I start to see news stories ….

    U.S. Debt Rating: Economists Wait to Hear From S&P

    That’s 3 days ago.

  21. Jib says:

    @john personna:
    Leaking it to the press after you leak it to the hedge funds is a good way to muddy the waters. Plausible deniability and all that.

    That is what an investigation should uncover. A real one anyway. We are long, long overdue for an investigation of the ratings agencies. Start pulling on that thread and you never know what will unwind. Rating agencies are in the middle of a LOT of transactions.

  22. Anderson says:

    I don’t think reacting to a downgrade by threatening prosecution of the downgrading agency is a wise thing to do.

    One party is willing to cut entitlements and raise revenues. The other party is not willing to raise revenues — and, when it comes to Social Security and Medicare, not really willing to cut entitlements either. (Medicaid, those fuckers are poor, they can die.) Simple. As. That.