What caused the United States to lose its AAA rating for the first time in 94 years, a rating that withstood two world wars, the Great Depression and (most of) the Great Recession, and a costly military buildup that bankrupted and demolished our Cold War foe, the Soviet Union, without a direct shot fired? Was it the dastardly Tea Party, with its demands for fiscal sanity and a solution to an oncoming tsunami of entitlement liabilities? According to the man who rates sovereign debt for the agency that downgraded the US, not really:
The head of Standard & Poor’s sovereign ratings, David Beers told “Fox News Sunday” he did not expect “that much impact” when global markets open on Monday due to what he called a “mild deterioration” in the U.S. credit standing to AA-plus from top-tier AAA. …
He also said the downgrade announced on Friday was not due to the budget positions of any political party and that on any future agreement, “We think credibility would mean any agreement would command support from both political parties.”
So a lack of consensus was part of the problem for S&P. But consensus about what?
Beers called the U.S. Treasury Department’s criticism of the credit rating agency’s analysis a “complete misrepresentation.” Even with the debt limit agreement passed by Congress, he said, “the underlying debt burden of the U.S. is rising and will continue to rise over the next decade.”
Actually, the Tea Party caucus in Congress had it right. The bond raters needed to see the US take a significant step towards ending deficit spending and getting future liabilities under control. The problem with the lack of consensus came from the resistance of Democrats to the fiscal realities of the situation we face. Instead of addressing the real problems, Democrats blocked any attempt to deal with the entitlement crises and would only agree to address discretionary spending.
I mentioned this as an aside in my earlier post, but it bears repeating here. Republicans cut the only deal they could get without control of the Senate and the White House. Had they refused to take that deal, then S&P and likely Moody’s would have lowered the rating on Wednesday, and Republicans would be taking the blame. Instead, this clearly shows that Democratic refusals to deal rationally with the entitlement crises are the reason for the decline in confidence in the US.
Call it a clarifying moment. Discretionary spending was and is a sideshow to what concerns rational investors. We could eliminate every cent of discretionary spending — defense, homeland security, education, welfare — and we’d still be adding $300-400 billion a year to our deficit through fixed entitlement spending.
Want to see why it’s the debt and not the taxes, Tea Party, or Congressional tiddlywinks? Heritage’s chart showing the growing bite from entitlements in the future demonstrates the problem quite clearly:
As for the political elements of the downgrade, they’re real — but it’s not the politics of the Tea Party that are the problem. To follow up my point in my previous post, note well how ObamaCare’s “entitlement reform” impacts the problem and “bends the cost curve.” The invariable end is a massive amount of liabilities that a free economy cannot possibly honor.
Janet Daley draws the proper conclusions, writing that both Europe and the US are currently proving that nanny-state structures cannot coexist with free economies in the long run. Inevitably, people have to choose between the command economies required by burdensome entitlement programs or free economies and personal responsibility:
We have arrived at the endgame of what was an untenable doctrine: to pay for the kind of entitlements that populations have been led to expect by their politicians, the wealth-creating sector has to be taxed to a degree that makes it almost impossible for it to create the wealth that is needed to pay for the entitlements that populations have been led to expect, etc, etc.
The only way that state benefit programmes could be extended in the ways that are forecast for Europe’s ageing population would be by government seizing all the levers of the economy and producing as much (externally) worthless currency as was needed – in the manner of the old Soviet Union.
That is the problem. So profound is its challenge to the received wisdom of postwar Western democratic life that it is unutterable in the EU circles in which the crucial decisions are being made – or rather, not being made. …
We have been pretending – with ever more manic protestations – that this could go on for ever. Even when it became clear that European state pensions (and the US social security system) were gigantic Ponzi schemes in which the present beneficiaries were spending the money of the current generation of contributors, and that health provision was creating impossible demands on tax revenue, and that benefit dependency was becoming a substitute for wealth-creating employment, the lesson would not be learnt. We have been living on tick and wishful thinking.
And Daley hits the nail on the head over who exactly has been irrational and radical in this debate:
The hardest obstacle to overcome will be the idea that anyone who challenges the prevailing consensus of the past 50 years is irrational and irresponsible. That is what is being said about the Tea Partiers. In fact, what is irrational and irresponsible is the assumption that we can go on as we are.
Exactly — and that’s exactly the point S&P made with its downgrade.
Update: If we don’t stabilize and reduce our long-term liabilities soon, we’ll get downgraded again, says S&P:
The credit rating agency’s managing director, John Chambers, tells ABC’s “This Week” that if the fiscal position of the U.S. deteriorates further, or if political gridlock tightens even more, a further downgrade is possible.
Chambers also said Sunday that it would take “stabilization and eventual decline” of the federal debt as a share of the economy as well as more consensus in Washington for the U.S. to win back a top rating.
He puts the odds of another downgrade at 3:1. I’d call it even money, at least while Democrats continue to blame the Tea Party for, er, wanting to do exactly what S&P demands.