August 6, 2011
One of the most remarkable things about Standard & Poor’s announcement late Friday night to downgrade the U.S. government’s AAA credit rating is the highly combative political tone of the document and the enormous pressure the agency is putting on a new joint congressional committee to come up with big cuts before year’s end.
The S& P statement berated Congress and the White House for engaging in reckless political brinksmanship that undermined the financial community’s confidence. Lawmakers finally agreed to plan for raising the debt ceiling and cutting discretionary spending by $1 trillion over the next decade, yet the plans fell far short of what was needed to stabilize the U.S. debt in the long term, so the new joint committee is supposed to recommend an additional $1.5 trillion of savings. But if the politically divided panel can’t agree, or if Congress rejects its recommendations, automatic spending cuts will kick in.
The recent roadblocks in Congress and the tenor and timing of the debate “is what put things over the brink,” said John Chambers, chairman of S&P’s sovereign ratings committee, this weekend. “We think, compared to some other highly rated governments, the U.S. government does not have the same proactive ability to achieve long term solutions that put public finances on a firm footing.”
“The political risks [in the U.S.] carry a bit higher rating than the fiscal part of the equation,” added David Beers, managing director of sovereign credit ratings at Standard & Poor’s. Beers explained on a conference call Saturday afternoon that the agency updated its rating criteria in June to include a number of economic, monetary, fiscal and external issues – including political stability. And S&P found the months of intense bickering and oneupsmanship by the White House and Republican leadership that led to final agreement on the Budget Control Act anything but reassuring. The S&P critique includes an extraordinarily detailed roadmap for how the White House and Congress should proceed, providing precise requirements for deficit reduction, insisting that increased tax revenues be part of the mix, and providing the long term goals for reducing the federal debt as a percentage of the overall economy.
‘Grand Bargain’ Redux – and Another Warning
The road map spelled out by S&P in its document and in comments from senior officials is essentially the “Grand Bargain” that Obama and Boehner came close to negotiating before conservative House Republicans blew the whistle and forced Boehner to drop out. That would have included cuts, increased tax revenues, reforms of Social Security and Medicare and other changes, totaling $4 trillion in savings over the decade.
“Although the Budget Control Act starts to take some steps on discretionary spending… the real action, in terms of long term savings, is on entitlements,” Chambers said. “You will need some action on entitlements, either by changing the parameters of the programs or by raising additional revenues to pay for these programs.”
Chambers defended S&P’s decision and said the ratings agency gave Congress and the administration plenty of advance warning that a downgrade might be possible if a credible deficit reduction package was not produced.
Even before S&P rattled the political establishment and the financial community with its critique of the government’s failure to adequately address its debt problems, there was concern that the creation of the new bipartisan “super committee” to try to take on major entitlement and tax reforms in a matter of months was once again a case of Obama and Republican and Democratic leaders kicking the can down the road.
On Saturday, S&P – one of the three major credit rating agencies – said that in the worst-case scenario, it would lower the credit rating of the U.S. again if economic growth slowed or if the super committee fails to achieve its targeted savings. S&P officials indicated that they have little faith that the new committee can create a bipartisan consensus on spending cuts and taxes to stabilize the U.S. government debt burden.
“I think there is plenty of blame to go around,” Chambers said. “This is a problem that is a long time in the making.” But the White House and congressional Republicans and Democrats were in no mood to accept blame, and essentially ignored S&P’s criticism that partisan brinkmanship right up to last Tuesday’s deadline for raising the debt ceiling to avert default had undermined confidence in the government.
Lawmakers Speak Out on Downgrade
House Speaker John Boehner, R-Ohio, in a statement said the S&P downgrade merely underscored the problems of runaway spending in Washington, while never addressing the larger issues of political irresponsibility. Senate Majority Leader Harry Reid highlighted the importance of the new fiscal super committee, also pointing out that revenue raisers, like closing tax loopholes, need to be included in any long term deficit reduction package.
House Republican Policy Committee Chairman Tom Price of Georgia said in a statement, “What is truly needed are safeguards to ensure this never happens again.” He argued that a Balanced Budget Amendment would do just that. “I implore the President and Democrats to work with us, together, in the next couple months, to end the job-killing spending binge without raising taxes on the American people, and stop spending money we don’t have,” he said. “Enough is enough!”
Treasury Department officials had fought with S&P officials before the downgrade was issued, arguing that the firm’s political analysis was flawed and that it had made a numerical error in a draft of its downgrade report that overstated the deficit over 10 years by $2 trillion. Officials had reviewed the draft earlier in the day.
“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said Friday night.
On Saturday morning the White House finally weighed in on the downgrade, saying that the administration “must do better” in tackling the deficit. Administration officials privately called S&P’s analysis flawed. Said White House press secretary Jay Carney, “The path to getting there took too long and was at times too divisive. We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges.” President Obama himself refrained from comment as he spent the weekend at Camp David.
Calls for Geithner to Go
The American Grassroots Coalition and Campaign to Defeat Barack Obama, two conservative grassroots organizations with several hundred thousand members, have teamed up to call for the firing of Treasury Secretary Timothy Geithner. “Geithner has to go. He has failed our country and our economy,” said Amy Kremer, chairman of American Grassroots Coalition.
With GOP leaders including Boehner and Senate Minority Leader Mitch McConnell declaring tax revenues off limits in the upcoming committee deliberations, and Democrats signaling an unwillingness to slash entitlements without GOP concessions on taxes, the negotiations this fall could well result in another messy stalemate that could further undermine the economic recovery and heighten public disenchantment with Congress and the White House. The new joint House-Senate committee will be made up of six Republicans and six Democrats, a recipe for stalemate if the two sides dig in. Senate Republican Whip John Kyl, R-Ariz., told The Fiscal Times last week that Republicans would refuse to consider major tax reform and tax increases during the limited tenure of the new committee through November.
If Obama and Boehner had been able to forge an earlier agreement and get it through Congress, it would have gone a long way towards stabilizing the debt, as S&P and budget reform groups desire. The presidential Bowles-Simpson commission had a similar game plan and trajectory that advocated $3 in cuts in government services, defense and entitlement programs – including Social Security, Medicare and Medicaid – for every $1 of fresh tax revenues gained by eliminating loopholes. But that plan never caught on, except with members of the bipartisan Senate “Gang of Six.”
Chambers told CNN Friday night that the political brinksmanship in Washington was “beyond our expectations” and that Obama and congressional leaders could have reached an agreement on a new debt ceiling and deficit reduction plan “in a timely fashion” by using the Bowles-Simpson commission recommendations.
The deal that finally emerged from the bitterly partisan talks and signed into law by Obama on Tuesday will do far less – capping spending on domestic and defense discretionary, but not touching entitlements, and raising no taxes. The president and Congress left the heavy lifting to the House-Senate committee, which will be appointed by House and Senate Democratic and Republican leaders within the next two weeks.