Unvarnished truth about the S&P downgrade

There's nothing like going to the source. Politicians are trying to spin the S&P downgrade of the federal government's credit rating in all sorts of self-serving ways.

I recommend taking a few minutes to read the short (eight pages) report for yourself. You might be as surprised as I was to see how the unvarnished truth about how this corner of Wall Street views our nation's finances.

Here's a link to a PDF file of the Standard & Poors Research Update, "United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative." (Or download it yourself from the S&P web site.)
Download US_Downgraded_AA+

I agree with the report's pessimism about the ability of Congress to competently deal with our fiscal problems. The wrangling over the debt limit increase was horrifying -- both to Amercian citizens and the rest of the world.

Republican intransigence, fueled by Tea Party rigidity over the size and role of government ("No Tax Increases! Ever!"), appears to be the main reason the federal credit rating got it's first-ever downgrade.

The S&P report clearly is looking for moderation, balance, compromise. Here's some excerpts about tax/revenue increases which haven't gotten as much press as they deserve. (I've boldfaced some pertinent points.)

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.

...Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options.

...Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. 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. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario--which, other things being equal, we view as
consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.

...The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.

Get the picture? It's damn clear. Ending the Bush tax cuts for high income people would be good news to Standard & Poors. Tax increases would help stabilize our country's credit rating at the dowrgraded AA+ level.

However, the baseline scenario is that the Bush tax cuts will stay in place. If this happens, the lack of increased federal revenue will contribute to a likely further downgrading by Standard & Poors.

This is exactly what President Obama and Congressional Democrats have been saying. Hopefully the S&P report will knock some sense into Republican brains. Spending cuts and revenue increases are both needed to get our fiscal problems under control.

This is what American voters want. This is what Wall Street wants. If the Republican Party persists in its crazy No revenue increases! pledge, it's 2012 election prospects are going to be found wanting as well.

Comments

[Brian Yoder]

I'm not a Republican but I can tell you that I certainly won't accept the politicians telling me that they want more of my money. What part of massive spending cuts don't they understand? They are already wasting trillions of dollars now, why should anybody expect them to do anything else if we gave them more? face it, trillions of dollars in cuts (now, not a decade away) is what the government needs to do. Anybody who says otherwise is ignoring reality.

[Randy]

You can see this as a partisan issue if you wish but it is really a systemic problem with Dems and Repubs not much different in that they are both bought and paid for by the same groups. This exchange from the Katherine Austin Fitts blog is enlightening:
http://solari.com/blog/?p=13316

[Willie R]

Forgive me, but Standard and Poor's deciding to downgrade the United States as a credit risk is somewhat akin to a disgruntled child informing it's parents that they will no longer accept everything they say as the truth.
It makes for fancy rhetoric, but nothing else.

[Brian Breedlove]

I'm glad the tea party is holding the line on taxes. Why should rich people pay a higher % of taxes than you or I? Everyone should pay the same % regardless of how much they make. How is it fair to base the % on how much a person makes? If there are too many loopholes for the wealthy then how would an increase on something that isn't being paid help anyway? Eliminate the tax breaks and make everyone pay the same %. A flat tax with no deductions is the only thing that's fair. We also need to take a hard look at congressional benefits and force congress to live like the rest of us. I laugh every time I hear them state that they are servants of the people. What a joke. It's all about "what's in it for me" for our politicians. Keep the tea party and can everyone else. We can start over with that.

[Anonymous]

So now conservatives are ignoring Standard and Poor's. Doesn't matter what credible source tells them that their ideological fantasy is batshit crazy and just plain wrong. God could tell them that they're wrong and they would still believe that they're in the right. Whole countries around the world, even an arm of Wall Street, are telling them to wake up from their fantasy; And yet still they think their ideology holds up to reality.

I guess it just feels better to pretend that the world is an Orwellian totalitarianism, and that you're all Goldstein's followers; The only ones who know the truth, while the rest of the globe are sheep.

[Blogger Brian]

Randy, the problem with the Fitts blog post is that the federal government isn't the same as a family. I've read several analyses by economists along these lines.

If ordinary people aren't engaging in economic activity, and businesses aren't either, an economy will go into a downward spiral without government action. So deficits sometimes are necessary, along with borrowing, of course.

Also, when people say that government should act businesslike, they're forgetting that businesses borrow money all of the time. Most businesses would go broke they had to stick to a "balanced budget."

And how many families never borrow for a car, mortgage, or whatever? Analogies between family budgets and business budgets are quite limited when applied to the federal government.

[Brian Breedlove]

I don't think conservatives are ignoring Standard and Poor's and their ideology is clearly not fantacy. The spending has to stop. I'm disappointed that they agreed to less of what was needed but it was probably just a last ditch effort to pass something even if it were wrong. If liberals want to close loop holes in the tax law then we need create a flat tax. No one should have to pay a higher tax % than anyone else, regardless of income level. Taking moore money from those that have doesn't help those that don't. Thinking that it does is a true ideological fantacy. or some call it socialism.