'There Will Have to Be a Fiscal Correction': S&P’s US Credit Downgrade, 10 Years Later

'There Will Have to Be a Fiscal Correction': S&P’s US Credit Downgrade, 10 Years Later

Joshua Roberts

John Chambers, former chairman of the sovereign rating committee at Standard & Poor’s, is one of the analysts who stripped the U.S. of its AAA credit rating in 2011, reducing it one notch to AA+ amid a tense battle in Washington over the debt ceiling. Bloomberg’s Brian Chappatta spoke with Chambers this week about that event and his view of the current fiscal situation. Some highlights (full interview here):

Why the US was downgraded in 2011: “You had a clear — although perhaps remote — possibility that the U.S. government would default on its debt, triggered by the debt ceiling. ... The fiscal position was a contributing factor, but the main factor was the political setting and the congressional brinksmanship.”

The value of the social contract: “The American Rescue Plan Act will weaken the country’s position [with respect to creditworthiness], just the same way as the large corporate tax cuts of 2017 did. It will also probably do nothing to improve its trend growth rate because it’s not addressing public investment. But it may, however, strengthen the social contract. My view is this act is a political measure, and in the end it’s going to have to be evaluated in political terms. The social contract has weakened a great deal during my lifetime, and if the act comes to be seen as strengthening the social contract, it might be worth the cost.”

Fiscal situation not improving: “Neither the Republican nor the Democratic parties have shown any ability to carry out countercyclical fiscal policy in good times. It’s one thing to have countercyclical fiscal policy in bad times, but you have to have some contraction when times are good. And we haven’t seen that. We didn’t see that in the four years running up to the election, and we’re not seeing it now.”

What could come next: “Eventually, there will have to be a fiscal correction. ... Now, what’s likely to happen is there will be measures of financial repression and policy makers will slowly try to inflate the debt away. That would be one endgame, and that worked fairly well in the 50s and 60s, so maybe it’ll work again. ... I think eventually taxes will have to rise, they’ll have to rise not only to adjust for what we’ve been doing the last few years but they’ll have to rise for increased health expenditures. Those will have to be fairly broad-based because you simply can’t get sufficient funds for what we’re talking about out of the superrich. And that can be done. But it takes a national consensus, it takes bipartisanship and it takes people taking a long-term view.”