Jack Cassidy on What S&P Got Right

Graham Griffith — Mon, 08 Aug 2011 20:50:00 GMT

While Moody's has decided to keep the US's credit rating at AAA, the focus today remains on Standard and Poor's decision to downgrade the rating to AA+. There is plenty of skepticism about the S&P decision. Paul Krugman points out S&P's questionable track record, here. And Economics of Contempt argues that the agency was "embarrassingly wrong," here.

One member of the Econoblogsphere who is saying the S&P downgrade makes sense is The New Yorker's John Cassidy. Cassidy does not take issue with those who say that S&P's decision was a political one. In fact, he argues that's the who point:

For years, the attitude in the markets has been that the two parties in Washington will eventually make the necessary policy changes, even if it takes a big selloff in the bond market to make them do it. I shared this cynical but ultimately optimistic view, and so did S. & P. and other ratings agencies. But the rise of the Tea Party and a further lurch to the right in Congress has changed the political calculus. With the country facing an imminent threat of default, the Republican Party showed itself unwilling to countenance any tax increases whatsoever, even ones that wouldn’t have gone into effect until 2013 at the earliest. Many Democrats, meanwhile, balked at the very idea of discussing changes to entitlement programs. The President, while calling for a “balanced approach,” seemed virtually powerless.

What ground is there for assuming that sanity will eventually prevail? Some, certainly. But enough to support an AAA rating? The fiscal arithmetic is pretty clear. According to estimates from the Congressional Budget Office and other authorities, perhaps half of the current budget deficit is due to the recession, which caused tax payments to fall and unemployment benefits and other expenses to rise. But that leaves a structural deficit of perhaps four or five per cent of G.D.P., which will remain even after the economy returns to full employment. To prevent the country’s debts from exploding over the next twenty or thirty years, this structural deficit needs to be brought down to two or three per cent, at which point the long-term debt-to-G.D.P. ratio would stabilize.

Read Why S. & P. Got the U.S. Government Downgrade Right here.

We also recommend Cassidy's Comment piece in the latest New Yorker, which is now available online.

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Jack Cassidy on What S&P Got Right