Where S&P Got it Right: The Tea Party Paralysis of the US Government

Standard and Poor's downgraded America's long term credit rating on Friday to AA+ with a negative outlook on Friday. Let's be clear about something: it was a bone-headed move, economically unsound, and I believe ultimately more damaging to the credibility of the S&P than to the borrowing costs of the US government. Yes, there was a glaring $2 trillion error in S&P's initial calculations. According to the Department of Treasury, the mistaken calculations were given a great deal of weight in the downgrade until at the pointing of the Department, S&P corrected their calculations, but decided to proceed with the downgrade anyway. So take it with a grain of salt.

Take it with another grain of salt, given that this is the same ratings agency that told us that loan-shark-forced subprime mortgage backed securities were "AAA" investments. But within their off-the-mark assessment, they did get a couple of things right: first, the GOP's economic terrorism, and second, the need for revenue. The best explanation I have heard so far was from Jared Bernstein, VP Biden's former economic adviser and a former member of the President's economic team. Bernstein appeared on The Rachel Maddow Show on Friday night. Please watch:

Basically, S&P concluded that political gridlock will keep the government from effectively managing its debt.

By and large, across the board, economists and fiscal and monetary policy experts (fiscal policy has to do with Congress and spending and taxes, monetary policy with interest rates and the Fed) broadly agree that the S&P's downgrade is very unlikely to have any significant immediate term impact on the borrowing costs of the US government. There the only factor to consider is whether the United States is capable of and is willing to pay its debt obligations, and simply by pushing any further need for Congress to get involved in the debt limit past the 2012 elections, that risk has been avoided. After all, the S&P has been downgrading Japan's long term credit rating for a while, yet interest rates in Japan remain at historic, near-zero or at-zero lows.

So if you are wondering if this rating downgrade will make your interest rates (or the government's borrowing costs) rise sharply or at all, the answer, in all likelihood, is a no. But that is probably why S&P did not downgrade the much-less talked about short-term credit rating of the United States from A-1+. Also, while we are talking about the long term credit rating, there are a couple of things to keep in mind here: when we are talking about a credit rating, there are two parts to it: the actual rating (AAA, AA, AA+, AA- etc.), and the outlook (stable or negative). On April 11, S&P took our rating from AAA stable to AAA negative. On Friday, they took it to AA+ with a negative outlook. But on what rationale?
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.
And this is not the end of it. S&P described two scenarios compared to their base-case - which, for the same Republican intransigence, assumes that the Bush tax cuts for the ultrawealthy will remain in place, despite the fact that the President has made it clear that in the absence of a revenue-raising method from the Congress after the work of the "supercomittee" at the end of this year. While making that assumption is dumb on their part, they do describe a scenario where the negative outlook could be changed to stable, and guess what that is? Yep, raising revenue by letting the Bush tax giveaways to the super-wealthy expire.
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. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
That is an 7-percentage point drop in the national debt as a portion of the gross domestic product. by 2021. So much for the wingnut theory that creating a welfare state for the superwealthy and multinational corporations reduces debt (by, you know, magically increasing government revenue). The S&P is correct in this. If you need a visual representation of what we just discussed, Jared Bernstein has this on his blog:
Impact of high-end Bush tax cuts on debt

The graph plots three scenarios of the debt as a share of GDP over the next decade.

–First, no new revenues from any tax increases, just the savings from the Budget Control Act (BCA–that’s the debt ceiling bill)–blue line;

–Second, no savings from the BCA, but new revenues from allowing the sun to finally set on the upper-end Bush tax cuts–red line;

–Third, both one and two: savings from the BCA and new revenues from the highend Bush sunset–green line.

Neither one nor two flattens the trend in the debt/GDP ratio, otherwise known as stabilizing the debt. But together, the debt ratio stabilizes.
Of course, the revenue side of this is paramount. Republican intransigence against any increase in revenue - to the extent that they are willing to force down the throats of the American people a Constitutional amendment to make it impossible to even close tax loopholes that aid the tax welfare system for the ultra wealthy.

It is often said that the real target of the terrorists on 9/11 was to paralyze the American economy. They did not succeed. But the Norquistian pledge for Republicans never to even consider making the ultra wealthy and multinational corporations pay their fair share of taxes has done more harm to our national economy and paralyze economic policy making than any terrorist could ever dream of. On September 11, 2001, amidst the destruction of 3,000 innocent lives, the terrorists destroyed but two proud symbols of American economic prowess. But as September 11, 2011 approaches, the fiscal paralyzing agents that came from the "Tea Party" to take over Congress last November seem determined to destroy the American economy itself. At least, they seem determined to turn the American economy from one bases upon a large and growing middle class to one based upon two classes: a tiny wealthy class and a large peasant class.

And the funny thing is that even Wall Street's lapdog, the S&P ratings agency (if anyone has any problems with me calling them Wall Street's lapdog, please check in with the "AAA" ratings of the mortgage backed securities) seems to realize the destructive nature of the Teabaggers' fiscal paralysis. In fact, that fiscal policy paralysis features as the main reason - if not the only reason, after they had to back off their economic grounds when the Treasury Department schooled them on arithmetic - for their worries about America's long term ability to meet its obligations.

If that type of intransigence continues, there is every reason to believe what S&P is predicting is going to happen is actually going to happen. On the other hand, there is a chance for a popular intervention to this GOP addiction to anti-American tax welfare system for the wealthy. That will be the 2012 elections.

But we cannot really wait till the 2012 elections to fix things. The Republicans are doing everything they can to worsen the economy, and at least by some measures, people have a clue about that. Congress is now hovering at a disapproval rating of 82% and an approval rating of 14% - that has been cut in half since January, when Republicans took over the House. Will that, combined with the triggers from the debt deal and the signal from S&P shake up some of the Republicans in Congress and force them to do what is right for this country rather than what is popular with the Tea Party (which, incidentally is about the same number that approves of this Congress)?

As David Axelrod said, this is the Tea Party downgrade. The Tea Party Republican House has delivered exactly zero jobs bills in the last seven months, but they have delivered bills to kill Medicare, starve children, kill off public broadcasting and eliminate women's medical and reproductive rights. Where are the jobs, Mr. Boehner?

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