Google+
Close
Down on the Downgrade?
John Berlau, Chris Chocola, Burton Folsom, and others talk about the S&P.


Text  


Samuel Gregg
There are many reasons to be cynical about ratings agencies. These are, after all, the same outfits that assured us collateralized-debt-obligation markets were doing fine just before they started imploding in 2007–2008. Their slowness in warning about the fading creditworthiness of corrupt entities such as Enron and government-sponsored enterprises such as Fannie Mae and Freddie Mac is a matter of record.

That said, Standard & Poor’s decision to downgrade America’s creditworthiness shouldn’t surprise us. It simply states in a pseudo-official kind of way what everyone — citizens, investors, politicians, and maybe even Paul Krugman — already knows: The failure of Washington’s neo-Keynesian policies combined with the long-term projections for entitlement-spending have lowered confidence in the U.S.’s ability to meet its fiscal obligations.

Advertisement
In terms of who’s responsible, the list is long. It embraces not only the Obama administration but fiscal progressives of all parties who have sat in the Congress and Oval Office over the past 70 years. Those economists who have long downplayed the significance of high debt in the name of demand-side policies are also culpable.

Blaming politicians and economists, however, is easy. A more uncomfortable reckoning would note that many Americans now expect high levels of government welfare spending. Soft despotism, to use a Tocquevillian phrase, is alive and well in America.

Another difficult-to-hear truth is that there is no simple way out of this mess. By “simple,” I don’t mean that we don’t know how to restore economic prosperity and reduce public debt. As Adam Smith wrote, “Little else is required to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.” In our present circumstances, that translates into reforming our Byzantine tax system but above all dramatically diminishing our dysfunctional welfare state.

The hard part is persuading enough Americans that we cannot go on this way. And that requires major downward adjustments in people’s expectations about government’s role in the economy. For, as long as many Americans are reluctant to accept that entitlement spending must be reduced in real terms, few politicians will have the moral courage to do what must be done. Policy change matters. Attitudinal change, however, matters even more.

— Samuel Gregg is research director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.


Aparna Mathur 

The widely anticipated downgrade of long-term U.S. debt finally happened on Friday night. S&P lowered the U.S. credit rating from AAA to AA+ amidst concerns about the government’s budget and the rising debt burden. This further fueled the decline in the Dow Jones and the NASDAQ as nervous investors realized that the debt deal did not go far enough toward resolving the U.S.’s economic uncertainties. The administration reacted as one might expect, blaming the ratings agencies rather than acknowledging that there was a real problem to be handled. Gene Sperling, head of the National Economic Council, slammed S&P for a $2 trillion mistake in its debt calculations.

Statistical errors aside, there is no getting away from the fact that the U.S. today has a debt-to-GDP ratio of approximately 100 percent, and it is projected to go much higher. Many countries with debt to GDP ratios of less than that have defaulted in the past. Future spending projections make it clear that debt and spending are out of control.

Also, it is not as if the debt number is a sole dark spot in an otherwise bright scenario. There is little to suggest that the U.S. has ever fully recovered from the economic recession that began in December 2007. GDP growth rates have been weak, averaging 0.4–1.3 percent, annualized, for the first two quarters of this year. There are still 6.8 million fewer nonfarm jobs than there were at the start of the recession. Many institutions still hold bad mortgage debt, and with the S&P/Case-Shiller home-price index declining again, the less said about the housing market the better. The outlook for the economy is decidedly weak.

Does this mean the United States is on the verge of default?

S&P has the reputation of being influenced by subjective economic and political conditions, rather than purely objective data. Also, its track record is not the best when it comes to predicting the likelihood of sovereign default. For example, it has been criticized for not downgrading Ireland’s debt rating until 2009 — long after the financial problems had become obvious. It is quite possible that S&P’s calculations have no predictive ability relating to the chance of U.S. default. The upward movement in ten-year Treasury prices Monday morning seems to indicate little market concern for the specter of default. But the S&P rating serves another purpose. It is a clear expression of unease at the state of the United States economy, and on that count it is right on target.

Many analysts fear that the U.S. may be heading for a double-dip recession. The downgrade therefore fit perceptions about the country’s troubled economic scenario. Rather than attacking the rating agencies for doing their job, the best response would be for the administration to do its job by cutting long-term spending and providing a less-uncertain future for the markets’ jittery participants.     

— Aparna Mathur is a resident fellow at the American Enterprise Institute.




Text  


Sign up for free NRO e-mails today:

NRO Polls on LockerDome

Subscribe to National Review