Saturday, August 6, 2011

A view to a downgrade

I woke up early this morning to the sound of screams, which I'm now pretty sure were my own. I don't know exactly what kind of effect the S&P downgrade will have on the U.S. or world economy; Dylan Matthews says it could be trivial, as it was with Japan's recent downgrade. But symbolically, it's horrible. It's a (technically) neutral observer saying "We know you have debts, and we know you have the money to pay them, but we don't think you'll do it." And it's hard to counter that assessment given recent political events.

Ezra Klein has a good take this morning. He notes S&P's chutzpah -- they told us just a few years ago that all those financial products from a few years ago that turned out to be complete junk deserved an AAA rating, which contributed to the massive meltdown of 2008. Oh, and thanks to that meltdown, government revenues have dropped and outlays have increased, which is a large part of the reason our debt has spiked. But that aside, they're not wrong to question America as a solid investment. As Ezra says, quoting the S&P statement,
“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” they explained in the statement accompanying Friday’s decision. After Republicans in Congress spent three months weighing whether or not to default on our debt and Senate Minority Leader Mitch McConnell said that paying our bills would never again be a foregone conclusion, can anyone really argue with that? After every Republican presidential candidate save Jon Huntsman either remained silent on, or flatly opposed, the deal to raise the debt ceiling, can anyone really say that U.S. debt is completely riskless? That there’s no chance of a political miscalculation, and if there is such a chance, that they can perfectly predict the outcome of the ensuing chaos?
I'd like to think that such a sobering assessment from an ostensibly neutral observer would turn this into a cooperative game, that it would force members of Congress to reconsider some of their previously held beliefs. It won't. Republicans read this as evidence that the cuts in last week's debt ceiling deal weren't deep enough. Democrats read it as evidence that Republican recalcitrance on taxes is killing the country.

What might be more realistic to hope for would be a reassessment of how the U.S. structures its political institutions. For example, perhaps we should just do away with the debt ceiling, an unnecessary vote that just invites hostage-taking. More generally, perhaps we should do away with counter-majoritarian rules (like the filibuster) and just let the majority party govern as it wishes. If Democrats want to increase services and taxes to pay for them, let them, and let the voters decide if they should remain in power or not. If Republicans want to return us to 1920s levels of services and taxation, let them, and let the voters judge.

I recognize that such an ideal can never be quite achieved in a system where executives and legislators are elected separately, which allows for divided government. But moving toward this ideal would likely be better than our current situation, in which one party's top priority is to protect government services and the other's top priority is to not pay for those services and both have the power to see their top priorities enacted simultaneously.


Robert said...

I'm more inclined to Kevin Drum's view, in this piece entitled "Why S&P is Wrong.":

He makes a number of points, but the one I found most compelling is that, in the end, a deal was done. That is, for all the hand-wringing and hostage taking, the debt ceiling was raised. And is it any wonder that it would take until the 11th hour to do it? That's just politics as usual, not a political breakdown.

And, so if the question that S&P is asking is, is the U.S. willing and able to pay its debts, the answer remains yes.

Seth Masket said...

I take Drum's point. I think he's right, to some extent, that S&P is acting like David Broder on steroids, punishing the U.S. for not having more amicable politics. At the same time, imagine this scenario:

Instead of folding, Obama announces (as Clinton did), I will not negotiate while the GOP while they hold our debt ceiling hostage. If they send me any debt ceiling increase bill with any conditions attached to it, I will veto it. What would have happened? Do we really think the GOP would have relented, or would we have, at least temporarily, defaulted? If the latter, is it really nuts for S&P to say that investing in U.S. debt is possibly not the best idea?

Robert said...

I suppose that if Obama made that announcement, and if the Republicans didn't relent, then no debt ceiling deal would have been reached. But that's a counterfactual that discards the premise of my point, which is that a deal was reached by these parties. In the end, they didn't cause a default, which suggests that they never would cause a default, just as no previous congress and administration has ever caused a default.

I guess what I'm really objecting to is the idea that a credit rating agency should be in the business of assessing not just the fiscal policy of a nation but the process - the politics - by which it comes to that fiscal policy. In that vein, what qualifies Standard & Poors, which I see in my mind as a collection of accountants and macroeconomists, to judge this or any other nation's political process? I mean, we all know about sausage and sausage making. It seems to me that the agency should only be talking about how good the sausage is rather than decrying the way it was made.

Seth Masket said...

I agree they're functioning outside their wheelhouse. At the same time, if you need to make evaluations about a nation's ability to pay its bills, and if those payment decisions are made through a democratic process, you kind of have to make political evaluations, don't you?

Anonymous said...

After listening to you two, i've decided to downgrade my wife's credit rating. she has debts, and she has money to pay them, i just don't think she will.

and i DO think they should be assessing our politics. they're assessing the result of the political process. in this case, the result is in their wheelhouse, our credit. they're saying "uh, you guys don't look so good." and i don't blame them.

Robert said...

I'm just adding another comment so that I say these words, which I would never get the chance to say if we didn't have the fabulous interwebs: thanks for the input, doctor glitter.

Okay, I'm also going to basically repeat my argument, pointing out that the "result of the political process" that you talk about is that the U.S. did not default, just as the U.S. has never defaulted.