S&P’s Downgrade

by Pejman Yousefzadeh on August 5, 2011

Here is the full report, and here is a story covering the event. The new AA+ rating is still very high, but we are officially in uncharted territory now.

Tyler Cowen, comme d’habitude, has some of the best thoughts on the downgrade. I especially think that the following observation is noteworthy:

I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.  Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times.  We needed a big dose of inflation, promptly, right after the downturn.  Repeat and rinse as necessary.  But voters hate inflation and, collectively, we proved to be cowards.  Too bad.

Concerning Professor Cowen’s observations regarding the need for revenue increases, I believe that those increases can be gotten through comprehensive tax reform that cuts the top rate by anywhere between ten and twelve points, while broadening the base, and getting rid of deductions. A VAT–the least distortionary tax there is, and one that is very good at collecting revenue–can also be added without harming the economy. Too bad that comprehensive tax reform is not in our future anytime soon; getting tax reform through Congress even during the best of times is a tremendously difficult proposition, and with an election year coming up and in the aftermath of a tremendously bitter fight over the debt ceiling, I just don’t see tax reform taking place in the near future.

Whether this downgrade turns out to have lasting effects remains to be seen; Moody’s and Fitch continue to give us a AAA rating. But at a minimum, this is highly embarrassing. Our prestige as a nation has taken a hit. I hope that the bond markets ultimately yawn; the Financial Times article I linked to above gives us reason to believe that it will, since, as Jack Ablin of Harris Private Bank points out, we have a savings glut, few safe havens, and the United States has one of the three most liquid sovereign bond markets. But we didn’t have to get to this position, it is a crying shame that we did, and the danger remains that the other two ratings agencies might follow suit.

Oh, and one more thing: There is enough blame to pass around for both parties when it comes to America’s fiscal situation. But many of the blogs on the port side are going to use this opportunity to try to blame Republicans for the ratings downgrade, rather than coming up with innovative ways to break the political impasse that–again–both parties have caused, and finding solutions to the ongoing debt crisis. Which tells you something about the proprietors of those blogs, I think.

  • Johndoe

    But, wait, I thought raising the debt limit and the deal for that rise were good and would prevent a downgrade.

    • Pejman Yousefzadeh

      I never guaranteed that, and you know it.

      • Johndoe

        Guarantee? No, surely not. But the implication was clear enough for all to see.

        So, DeMint and the “Hobbits” were right. The rating agencies didn’t much
        care if the debt ceiling was raised. What they cared about was the
        long-term prospects of the U.S. government paying back $15-plus
        trillion, which is where our national debt (both publicly held and
        obligated to trust funds) will be shortly. So, thanks to all you
        pragmatists, we’ve gone and ruined a 70-year-old, solid-gold reputation.
        Take a bow.

        • Pejman Yousefzadeh

          Just because you claim “implications,” doesn’t mean they exist. You could be lying about what I wrote, and I daresay that you are. And in fact, S&P cited the political fighting as the reason for the downgrade–something you didn’t cite because either (a) you are ignorant, or (b) because you didn’t want actual facts to interfere with your argument.
          So thanks to all of you on both sides of the partisan divide who said that we ought to go on battling this out, instead of accepting a pragmatic, workable compromise, we’ve gone and ruined a 70-year old, sold-gold reputation. Take a bow.

          • Johndoe

            Oh, right, I’m lying, and you’re completely above the fray, the only adult in the room. Gee golly gosh, that sounds awfully familiar. Where on Earth could I have heard that before?

            More and more every day you sound like you’re fighting for the other team. You’d rather compromise than stand up for what you know is right. You play by their rules on their field and think you’re going to get what you want. One day you’ll wake up and see what all your pragmatism got for my kids and grandchildren.

          • Pejman Yousefzadeh

            This isn’t about “playing for the other team.” This is about doing right by the country; something you don’t seem to understand. When I can’t get everything I want, I negotiate and compromise–like other adults do. Then I go back later and try to get more. You, meanwhile, are willing to shun pragmatism, because you think it’s a dirty word–which shows you don’t even know what the word means. Negotiating doesn’t mean “play[ing] by their rules on the field”; anyone who thinks that, doesn’t know how to negotiate.
            Of course, if you feel like acting like an adult, that will prevent me from behaving like the only one in this conversation. But thus far, that hasn’t happened. You lied about what I wrote, you lied about what I implied when I called you on your first lie, and then you lied that fighting more about the debt ceiling would have prevented a default–despite a story featuring quotes that indicate that the fighting on both sides led to a default. I am sorry that the facts are inconvenient for you, but that means that perhaps, you ought to change your mind, instead of trying–and failing–to spin them to a conclusion that is more agreeable to you.

          • Johndoe

            I did not write that. My comment was edited by the proprietor of this blog. It is clearly he that has no shame and not I, as only one without shame would stoop to such underhanded, authoritarian tactics. He pays lip service to high ideals and then acts in direct contravention of said ideals. He’s as bad as those he claims to oppose.

          • Johndoe

            I did not write that. My comment was edited by the proprietor of this
            blog. It is clearly he that has no shame and not I, as only one without
            shame would stoop to such underhanded, authoritarian tactics. He pays
            lip service to high ideals and then acts in direct contravention of said
            ideals. He’s as bad as those he claims to oppose.

          • Johndoe

            This comment was written by a canary.

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