Wall Street Journal
Why did Standard & Poor’s drop its « negative » long-term outlook bomb on America’s AAA credit rating yesterday? S&P revealed no numbers not previously known to a « shocked » stock market, which dropped 140 points. So what’s new?
Chief White House economist Austan Goolsbee declared that S&P had made a « political judgment, » and we’d have to agree, though probably not for the same reasons. The bulk of S&P’s analysis is taken up with repeatedly citing what it sees as next-to-no chance that Washington will do anything significant on deficit reduction this year or next. « The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term challenges will persist until at least after the national elections in 2012, » said the credit rating outfit. S&P’s announcement is almost wholly a political analysis of the budget outlook. There is only one reason the rating agency could suddenly have turned this dark on politics in Washington: President Obama’s speech at George Washington University last Wednesday. Mr. Obama’s « fiscal policy » speech may have sent progressive pundits cart-wheeling, but its political effect was to poison the prospect for budget negotiations.
The harshness of Mr. Obama’s anti-Republican rhetoric and the universal conclusion that this was a Presidential campaign speech make it very difficult for GOP Congressional leaders to believe they can enter into a budget negotiation in which the White House will deal in good faith. The hyper-politicized Obama White House calculated that the release of a GOP proposal by House Budget Chairman Paul Ryan was the moment to unveil its re-election counter-attack. This week Mr. Obama is taking that speech on what looks like the campaign trail, first at a Virginia community college and then in front of the millionaires and billionaires at Facebook’s headquarters in Silicon Valley. S&P, as did many others, said it saw the Obama and Ryan budget proposals « as the starting point of a process, » but « That said, we see the path to agreement as challenging because the gap between the parties remains wide. » And: « We believe there is a significant risk that Congressional negotiations could result in no agreement. » And this stalemate will continue « over the next two years. »
S&P is simply connecting the political dots after last week’s un-Presidential tirade against the GOP.
S&P’s analysis also discussed fiscal conditions, most notably the scale of the deficit problem before and after 2008: « [I]n 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover. » This surely is one Bush comparison that the Obama team wishes to bury. The S&P outlook also says its baseline scenario for the U.S. economy is « near 3% annual real growth. » But « near » 3% growth will not revive tax revenue enough to shrink the growing U.S. debt burden, which is heading toward 80% of GDP.
Notably, there was no call in the S&P note for closing the deficit with tax increases, a staple of ratings-agency fiscal fixes. We hope this neutrality reflects some recognition of the way countries like Greece, pressed to cut spending while raising taxes, descend into an endless downward growth spiral. That’s how a nation’s outlook becomes truly « negative. » The Obama fiscal policy since 2009 has been to explode the U.S. balance sheet with ever-greater spending financed by monetary reflation—which the President in his speech euphemized as « emergency steps. » The result after more than two years is what scares S&P and more than a few Americans: a historically subpar recovery, unprecedented deficits, persistently high unemployment, commodity inflation and now growing anxiety over U.S. creditworthiness.
The Ryan budget has been criticized as heartless and cruel. But its purpose is to address the rising U.S. debt problem without tanking the U.S. economy, and to do so before a truly heartless and cruel credit downgrade of the sort S&P gave Japan in January. Mr. Obama’s response was simply to mock the GOP proposal. The ratings agencies are hardly the last word on U.S. economic health. But the S&P outlook is a warning to the White House that financial markets have noticed that this President seems to have decided that his path to re-election lies in demonizing his opponents rather than seeing to the nation’s fiscal well-being.