Saturday, August 6, 2011

US Debt: Down and Out

US debt was just downgraded to AA+ from AAA. The commentary on whether this was the right or wrong decision could be read anywhere. Ezra, Salmon, and Cowen seem like enough to increase your knowledge base sufficiently. The thing we need to look more into, is the rationale for the downgrade. Here's a good line from the beginning of its report:

"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."

So no new taxes and threats over the debt ceiling are the proximal cause. I understand why S&P made this move, it was definitely the correct one. However, the motivation for the decision seems to be that they were hoping to point the government in the right direction. This seems like a scenario where good intentions go awry. How many stories have you read that say the downgrade was related to political, and not economic factors? That in itself makes very little sense to people thinking about US debt ratings. When they hear our debt has been downgraded, the only available reference point for some possible cause is the "spiraling" debt scenario they hear about. Far from helping to clarify the debate, it seems this S&P downgrade will only help to entrench those forces who view a long term debt problem through a short term deficit lens, hardening the sides in the these budgeting debates. Today we have already seen Republican leaders coming out swinging on Obama for letting this happen. This is really a sad state of affairs. How does a country begin its decline? With a dash of internal squabbles and a helping hand from outside powers intervening sounds like a good recipe. I will say it until it doesn't seem apt, but hooray to a lost decade.


  1. My question is, why didn't they downgrade the debt last week, when they may have had some effect on the debt-ceiling negotiations? In lieu of proactivism, S&P chose to punish Congress. I really do not get the purpose of this downgrade.

  2. My speculation is that S&P thought that even though the debt ceiling crisis was self-inflicted that maybe it would produce some sustainable debt deal. What they saw was that even under the threat of financial calamity, R's were not willing to budge even a tiny bit on the revenue question and entitlements were not even discussed. So the S&P obviously had suspicions, but I feel the end result put the final nail in the coffin.