Is the U.S. Credit Rating a Victim of GOP Sabotage?

[one...two...tree 2,762]

The fiscal clown show continues. A few days after Congress and the White House agreed to raise the debt ceiling and cut spending, Standard & Poor's has downgraded the United States of America's credit rating from AAA to AA+.

S&P, which covered itself in a substance other than glory during the mortgage crisis, may have a poor record and strange methodology when it comes to sovereign ratings. France, which has a far higher debt per capita ratio than the U.S., still enjoys a AAA rating. And a downgrade, alone, doesn't mean U.S. interest rates will spike -- on Monday or at any time in the future. Japan's credit rating was downgraded several years ago, when the interest rates its government paid on bonds was already extremely low, and they've generally trended lower in the years since.

Market conditions, the trajectory of economic growth and relative value can play as big -- if not a bigger -- of a role in determining interest rates than a rating.

But that doesn't mean we should ignore S&P's Friday evening shot across the bow. In downgrading the U.S.'s credit rating, S&P points out what has long been obvious: Washington's inability to come to an agreement on how to close the large fiscal gaps that have emerged since the recession began is troubling. Recent events have sapped the agency's confidence that the government can and will do what is necessary to align revenues with spending commitments. And it's difficult to escape the conclusion that America's credit rating was intentionally sabotaged by Congressional Republicans.

It has long been obvious to all observers -- to economists, to politicians, to anti-deficit groups, to the ratings agencies -- that closing fiscal gaps will require tax increases, or the closure of big tax loopholes, or significant tax reform that will raise significantly larger sums of tax revenue than the system does now. Today, taxes as a percentage of GDP are at historic lows. Marginal rates on income and investments are at historic lows. Corporate tax receipts as a percentage of GDP are at historic lows. Perhaps taxes don't need to rise this year or next, but they do need to go up in the future.

Otherwise, the math of deficit reduction simply doesn't work. And that's how the deficit reduction deals signed off on by Republican presidents like Ronald Reagan and George H.W. Bush came about.

Yet the action in Washington in the past year has all gone in the opposite direction. President Obama deserves some of the blame. Several months ago, he struck a deal with Congress to make the fiscal situation worse -- extending the Bush tax cuts for two more years and enacting a temporary cut in the payroll tax.

But Congressional Republicans deserve much more of the blame. For this calamity was entirely man-made -- even intentional. The contemporary Republican Party is fixated on taxes. It possesses an iron-clad belief that the existing tax rates should never go up, that loopholes shouldn't be closed unless they're offset by other tax reductions, that the fact that hedge fund managers pay lower tax rates than school teachers makes complete sense, that a reversion to the tax rates of the prosperous 1990's or 1980's would be unacceptable.

In the past two years, this attitude has combined with a general hostility to playing ball with Democrats on large legislative issues, a near-blanket refusal to conduct business with President Obama, and, since the arrival of the raucous Tea Party freshman, a cavalier attitude toward the nation's obligations. It was common to hear duly elected legislators argue that it wouldn't be a big deal if the government were to pierce the debt ceiling and default on its debts.

This downgrade is the logical outcome, to a degree, of the long-running "Deal or No Deal" dynamic in Washington. For much of the last two years, President Obama and various fiscal reform groups have urged a grand bipartisan deal that would make a dent in the short- and long-term deficits. Every group -- from the bipartisan Bowles-Simpson Commission on down -- argued that a large package of spending cuts and tax increases or reforms would be the way to go. Polls showed that American voters generally endorsed a mix of spending cuts and tax increases. And plenty of neutral observers thought that the approach of the debt ceiling expiration would help forge a grand bargain.

Many observers (including this one) argued that such efforts were doomed to failure. For President Obama, all the incentives weighed toward making a big deal, even one that would upset his base. It would show an ability to work on a bipartisan basis and make concrete progress and take the issue off the table for 2012. But for Republicans, all the incentives weighed against a big deal. By definition, anything that is acceptable to President Obama and Democrats is unacceptable to today's Congressional Republicans. It almost doesn't matter what the substance is. Why would they sign off on any measure that would include revenue increases that the president wanted? Congressional Republicans don't believe in higher revenues as a matter of ideology, as a matter of economics or, most importantly, as a matter of political tactics. Top Congressional Republicans have expressed a desire to deny victories to the president.

And so, in a completely predictable pattern, every time the discussions got around to revenue increases, Republicans pulled back. House Speaker John Boehner was willing to entertain the possibility of several hundred billion dollars of increased revenues, until he realized he couldn't sell it to his own caucus. The anti-tax radicalism of the Congressional GOP took revenues off the table and made a large deal impossible. The result was a lengthy manufactured crisis and a small deal that relied solely on spending cuts, and even that was opposed by a big chunk of the House GOP caucus.

Judging by S&P's release, this needless brinksmanship and effort to take the debt ceiling hostage seriously influenced the agency's thinking. It didn't like the theatrics, and it didn't like the outcome. While the deal took default off the table, the agreement "falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade." In other words, S&P downgraded in the U.S. in large measure because the recent debt deal didn't do enough to stabilize finances.

The irony, of course, is that the very attribute that pushed S&P to downgrade -- the inability of the U.S. political system to agree on large topics -- may help improve the fiscal situation. At the end of 2012, the Bush tax cuts are slated to expire. If the two parties fail to agree on some very controversial issues in the midst of an election year, taxes will rise across the board, on income and on investments, producing trillions of dollars in revenues over the coming decade.

Daniel Gross is economics editor at Yahoo! Finance.

http://finance.yahoo.com/blogs/daniel-gross/u-credit-rating-victim-gop-sabotage-021622372.html

[SMOKE 1,426]

Is the U.S. Credit Rating a Victim of GOP Sabotage?

no, its a victim of obama & the dems NOT heeding the warning & advice of credit rating agencies to CUT 4 trillion or risk a down grade.

/thread.

[Mr. Big Dog 10,747]

Is the U.S. Credit Rating a Victim of GOP Sabotage?

no, its a victim of obama & the dems NOT heeding the warning & advice of credit rating agencies to CUT 4 trillion or risk a down grade.

/thread.

The administration actually had such a proposal on the table. It was Mr. Boehner - pressured by his tea party ignorants - that walked away from it.

[Obama 2012 1,714]

GOP sabotage?

Sure, I'll bite.

Perhaps had Reagan not selected that POS Alan Greenspan to be the chairman of the Fed, then maybe just maybe we wouldn't be in this mess at all.

Of course, the Clinton administration had a chance to stop him. Actually they were warned to stop him. However criminals like Larry Summers wouldn't dare allow that to happen and all warnings of the economic woes to come were ignored.

Why people choose to ignore the facts of what has really happened and why people refuse to blame the real culprits in all of this (Hello the banks) is beyond me. Everyone wants to blame congress, blame the president, when they are stuck listening to TWO individuals 99% of the time. That's the chairman of the fed, and the secretary of the treasury. and the ONLY things those two individuals give a damn about, is making sure that the banks they work for, make money. They don't give a damn about you, about me, or this country one bit. They only care that she acts like a teet for THEIR pockets.

[scandal 951]

The administration actually had such a proposal on the table. It was Mr. Boehner - pressured by his tea party ignorants - that walked away from it.

Yup. This was directly addressed right in the OP. Not that people who comment in these threads ever bother to read the articles they glibly comment upon.

This downgrade is the logical outcome, to a degree, of the long-running "Deal or No Deal" dynamic in Washington. For much of the last two years, President Obama and various fiscal reform groups have urged a grand bipartisan deal that would make a dent in the short- and long-term deficits. Every group -- from the bipartisan Bowles-Simpson Commission on down -- argued that a large package of spending cuts and tax increases or reforms would be the way to go. Polls showed that American voters generally endorsed a mix of spending cuts and tax increases. And plenty of neutral observers thought that the approach of the debt ceiling expiration would help forge a grand bargain.

Many observers (including this one) argued that such efforts were doomed to failure. For President Obama, all the incentives weighed toward making a big deal, even one that would upset his base. It would show an ability to work on a bipartisan basis and make concrete progress and take the issue off the table for 2012. But for Republicans, all the incentives weighed against a big deal. By definition, anything that is acceptable to President Obama and Democrats is unacceptable to today's Congressional Republicans. It almost doesn't matter what the substance is. Why would they sign off on any measure that would include revenue increases that the president wanted? Congressional Republicans don't believe in higher revenues as a matter of ideology, as a matter of economics or, most importantly, as a matter of political tactics. Top Congressional Republicans have expressed a desire to deny victories to the president.

[SMOKE 1,426]

The administration actually had such a proposal on the table. It was Mr. Boehner - pressured by his tea party ignorants - that walked away from it.

they did? link me to it please.

Yup. This was directly addressed right in the OP. Not that people who comment in these threads ever bother to read the articles they glibly comment upon.

there is a difference in cuts & tax increases.

gawd i hope bbq gives obama gas. some people could use some fresh air.

[scandal 951]

they did? link me to it please.

there is a difference in cuts & tax increases.

gawd i hope bbq gives obama gas. some people could use some fresh air.

There is a difference between spending cuts and tax increases, you are right.

A grand bargain for $4T requires both. That's what Obama laid out and was negotiating with Boehner. That's what S&P was looking for to maintain the AAA rating. That's what Boehner walked away from, knowing he'd never get it through the House and would have a full-scale revolt in his Caucus if he tried.

We all witnessed this history, it played out on our TV screens and news columns just a few weeks ago. This is not ancient archaic history or an obscure corner of public policy. Anyone who witnessed the Debt Ceiling drama over the past month ought to be keenly aware of who was saying what, offering what, doing what, walking away from what.

Obama is by no means scot-free on the downgrade. He did NOT act on Simpson-Bowles months ago, and he did not tie the tax cut extensions in Dec to a long term deficit grand bargain. He should have done those things, and more. But during the past month it's been pretty damn obvious who the hold outs were that did not want a $4T deal, and who was pushing for it.

[Niels Bohr 72]

I love this one.

But Congressional Republicans deserve much more of the blame. For this calamity was entirely man-made -- even intentional. The contemporary Republican Party is fixated on taxes. It possesses an iron-clad belief that the existing tax rates should never go up, that loopholes shouldn't be closed unless they're offset by other tax reductions, that the fact that hedge fund managers pay lower tax rates than school teachers makes complete sense, that a reversion to the tax rates of the prosperous 1990's or 1980's would be unacceptable.

http://finance.yahoo.com/blogs/daniel-gross/u-credit-rating-victim-gop-sabotage-021622372.html

[Mr. Big Dog 10,747]

there is a difference in cuts & tax increases.

No shite Sherlock! You're just too smart for these boards, really. No, not really. You see, what you fail to grasp is that the $4 trillion "cut" that was on the table was a cut in the deficit which was to be accomplished via a mix of reduced spending and increased revenues. No rating agency has ever suggested that the deficit reduction package they would have liked to see should be all reduced spending. In fact, if that's all you do, you'd actually increase the deficit since you'd be suffocating the weak recovery. More unemployed and less growth will result in increased, not decreased, deficits. Very basic economics. Lots of precedent out there.

[웃 910]

I love this one.

The GOP are morons more or less.

If I was the owner of a large company (the US) and the company was in big trouble financially: revenues (taxes) were low and spending/debts were high. If my accountants informed me that I could save $3.8 trillion over the next decade (projected amount trimmed off debts/deficits if Bush tax cuts expire) then I would not have to think twice...It is pretty much a no brainer.

Edited August 6, 2011 by Lord Infamous

[SMOKE 1,426]

There is a difference between spending cuts and tax increases, you are right.

A grand bargain for $4T requires both. That's what Obama laid out and was negotiating with Boehner. That's what S&P was looking for to maintain the AAA rating. That's what Boehner walked away from, knowing he'd never get it through the House and would have a full-scale revolt in his Caucus if he tried.

We all witnessed this history, it played out on our TV screens and news columns just a few weeks ago. This is not ancient archaic history or an obscure corner of public policy. Anyone who witnessed the Debt Ceiling drama over the past month ought to be keenly aware of who was saying what, offering what, doing what, walking away from what.

Obama is by no means scot-free on the downgrade. He did NOT act on Simpson-Bowles months ago, and he did not tie the tax cut extensions in Dec to a long term deficit grand bargain. He should have done those things, and more. But during the past month it's been pretty damn obvious who the hold outs were that did not want a $4T deal, and who was pushing for it.

thank you for your honesty Ron. you're one of the few democrats here that is honest about discussions like this. i applaud you sir. fact is..both parties are responsible. but, the facts you mentioned...the dems kept dragging their feet & at the end wanted to attach X,Y,& Z to any agreement kept pushing the GOP leaders to push back. is what will stand out to most Americans come election time.

[SMOKE 1,426]

No shite Sherlock! You're just too smart for these boards, really. No, not really. You see, what you fail to grasp is that the $4 trillion "cut" that was on the table was a cut in the deficit which was to be accomplished via a mix of reduced spending and increased revenues. No rating agency has ever suggested that the deficit reduction package they would have liked to see should be all reduced spending. In fact, if that's all you do, you'd actually increase the deficit since you'd be suffocating the weak recovery. More unemployed and less growth will result in increased, not decreased, deficits. Very basic economics. Lots of precedent out there.

hey genius. the precedent for the last 3 years is obama & his advisors being full of sh!t & the world outside the US shaking their heads in disgust

[scandal 951]

The GOP are morons more or less.

More or less.

There are some who have a clue. For example, the Republicans on the Gang of Six understand the logic of balanced tax reform/spending cuts, and for bipartisan compromise.

Let's list those sensible Republicans by name:

Saxby Chambliss (Georgia)

Mike Crapo (Idaho)

Tom Coburn (Oklahoma)

Hear, hear. The non-moron contingent of the GOP. Otherwise known as the "RINOs" to everyone else in the GOP.

[Mr. Big Dog 10,747]

hey genius. the precedent for the last 3 years is obama & his advisors being full of sh!t & the world outside the US shaking their heads in disgust

The world is shaking their heads in disgust over the ignorants in Congress suffocating the economic recovery for political gain. I read non-US papers and I tell you that it's not the administration the world is concerned about. They're concerned perhaps about the administration's inability to effectively deal with the tea party morons but from a policy point of view, it's the tea party crazies that has the world worried.

[scandal 951]

thank you for your honesty Ron. you're one of the few democrats here that is honest about discussions like this. i applaud you sir. fact is..both parties are responsible. but, the facts you mentioned...the dems kept dragging their feet & at the end wanted to attach X,Y,& Z to any agreement kept pushing the GOP leaders to push back. is what will stand out to most Americans come election time.

Thank you too, Smoke. I don't expect to agree on all the issues with the people I engage in debate. But I do value respectful and intellectually honest discussion. Which is how you play the game, and I applaud you for that as well. As to the rest - I just put them on ignore. Easier that way.