U.S. Debt Outlook: Downgrade to Negative

Tuesday, April 19, 2011

Traders work on the floor on the New York Stock Exchange on April 18, 2011 in New York City following news that Standard and Poor's had cut its long-term outlook on U.S. debt to negative. (Getty)

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Simon Johnson, former chief economist of the International Monetary Fund and professor at the MIT Sloan School of Management, talked about why Standard & Poor's downgraded the outlook for U.S. debt to "negative" and how that factors into the ongoing battle over the national debt. Washington Post Economic Policy Reporter reporter Lori Montgomery joined the conversation to talk about how the S&P rating might change the political landscape of debt in Washington.

'Welcome to Capitalism'

The United States' sovereign credit rating remains desirable, but after S&P downgraded our long-term outlook to "negative" yesterday—essentially saying that our rating will drop sometime in the near future, should we fail to address our debt — the stock market responded with similar pessimism.

However, Simon Johnson says there's ample reason to be suspicious of S&P's findings—or, at least, to take them with a big grain of salt.

They don't have a lot of credibility left after totally blowing all major calls of the past decade...The chance that the United States would not pay its debts after more than 200 years of being the best creditor in the world, that chance exists. It is quite remote in my assessment. But there's no question that S&P is trying to swing the other way and trying to get some attention from the left and right, and it's obviously working.

Since 2000, S&P had given out AAA ratings to several financial institutions, ratings that were exposed by the crisis as being largely bunk. In shaking off their prior flubs, S&P may be overcompensating by paying excessive attention to the federal government.

Diligence is appreciated, but this does little to allay worries that S&P can't be trusted. Where the agency once may have been lax in order to bolster profits, now it's equally likely that it's cracking down for the sake of appearances. Johnson said that in both cases, the facts take a back seat.

Welcome to capitalism. This is the business they're in. They want to have attention, curry favor, and in my assessment this is an exaggerated document.

Our debt is what?

If investors and creditors lose their faith in the United States' ability to pay off its debts, the global community may decide to take its money elsewhere. Domestic interest rates—the price of borrowing in the U.S.—would climb, dealing another blow to the delicate economic recovery.

All roads lead to the debt problem, and what our government will do to correct fiscal course. Should we take drastic action as soon as possible to get our debt under control and avoid a ratings bust? Not so fast, said Simon Johnson, who held up the effects of Britain's belt-tightening as a cautionary tale to slash-and-burn deficit hawks.

They had a budget issue, a financial crisis, and the conservative reaction in the new government is excessively speedy in their fiscal adjustment, meaning it's slowed down the economy. I think they had more time and could have put a sensible, responsible adjustment program in place...[For the U.S.] there are many options still on the table, including relatively modest, well-planned changes to both spending and taxes that could be put into play over a number of years and would not significantly slow the economy at all.

Lori Montgomery agreed that there was plenty of evidence to suggest the U.S. take a more measured approach to dealing with debt, and said that complicates a signature thrust of the Republican agenda.

The weak economy argues against beginning any kind of austerity program until 2012 or 2013 at the earliest. We've seen from an array of independent fiscal commissions that we shouldn't pull back on the accelerator just yet. Republicans obviously disagree because they promised voters they would cut spending.

Republicans' revenue problem

Absent significant spending cuts, which could hurt the economy, confronting deficits requires raising tax revenue. That's the opposite of what Congressional Republicans ran on in their sweeping 2010 victories. But in the hangover from election night, said Lori Montgomery, certain realities have set in. Conservative Republicans like Reps. Tom Coburn and Saxby Chambliss have said that taxes need to be back on the table.

There's a clever way to go about doing that, though. Montgomery made the point that raising tax revenue is not the same thing as raising tax rates, and that you can do the latter without having to use a slew of politically toxic phrases.

If you're going to reform the tax code to lower rates and get rid of deductions and breaks, you can mask the fact that the tax code would actually collect more in revenue because you're giving people a break in their rates. If that sort of alchemy can be achieved, I think Republicans could support that.

Dropping the ball

Simon Johnson said that for all the concern about our government's fiscal policy, it's the private financial sector that we should be watching. That's the same industry that S&P should have done a better job of patrolling prior to the 2008 meltdown—and the industry nobody looks to in the debt crisis blame game.

Look at how much debt we've increased as a result of the financial crisis, as a result of what banks were allowed to do, as a result of a highly risky financial system. Compare the Congressional Budget Office forecast for debt in 2018, the forecast they put out in 2008 versus the one they put out in January: that's a $10 trillion increase in debt, a 50 percent increase in our debt to GDP ratio because of what banks did. Did S&P mention in its document, does Paul Ryan talk about, does President Obama talk about the financial system as posing the most important pressing fiscal risk to the United States? No, they don't. S&P has blown another call on that; Ryan and Obama need to wake up and look hard at what really has pushed up our debt to GDP ratio.


Simon Johnson and Lori Montgomery


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Comments [17]

Henry from Katonah

But the Brian Lehrer show and the "It's a Free Country" board is not a market.
Usually this show injects some precision into discussions like this.
In the corporate world, putting a company's rating on watch is a response to important announcements - like a merger with a lower rated company.
By that criteria, S&P should have called a negative watch when tea-party candidates were elected to the House.

Apr. 19 2011 11:07 AM

Henry from Katonah - I appreciate your clarity, but market's don't a hint or a rumor can cause a plunge - this is the state of affairs

Apr. 19 2011 10:51 AM

Standard & Poor's? You mean the ratings agency still has credibility after their bank ratings? WHAT"S THE MATTER WITH US???

Apr. 19 2011 10:47 AM

AFAICT ratings agencies tend to do what's helpful to themselves and their friends. their ratings tend to reflect their interests. at the moment, the cost cuting scenarios being pushed in congress would probably leas to reductions in funding for the regulatory agencies that would be watching them and their friends. the fox is trying to influence how well the hen house is guarded.

Apr. 19 2011 10:38 AM
Edward from NJ

The problem with ratings agencies is that the bond issuers *pay* for the ratings. In the lead up to the latest crisis, the banks shopped around different agencies until they found one that would give them the rating they wanted.

Apr. 19 2011 10:36 AM
jgarbuz from Queens

Until we get our energy consumption WAY DOWN and the quality of our K-12 educational system WAY UP, our economy will continue to go UNDER..

Apr. 19 2011 10:33 AM

they could just buy gold

Apr. 19 2011 10:29 AM
CL from New York

BL and company are missing the elephant in the room: the size and power of the US economy. Nothing, China included, comes close. Assume, for the sake of argument, that China decides to retreat from investing in the US. Where will it put all of that capital?

Apr. 19 2011 10:27 AM

@Jason from Secaucus

You are completely right.

In my opinion the whole concept of rating agencies needs reevaluation and ultimately overhauling, or elimination.

Apr. 19 2011 10:24 AM
nancy from queens

when congressional entitlements such as taxpayer funded healthcare a-f-t-e-r they leave congress is on the table, i'll believe congress is also serious @ the debt.
anybody done any numbers on how much that's costing this country?

Apr. 19 2011 10:21 AM
Henry from Katonah

Watch your language! Or more properly, watch your terminology.
A negative watch - is not a "downgrade". A "watch" supposedly means "wait and see." A downgrade is when the rating is lowered, which has not happened.
Since when does S&P have any credibility , when you consider what they were rating mortgage-backed debt 2 years ago?

Apr. 19 2011 10:20 AM

1) Social Security DOES work, which is why Republicans are attacking it.

2) "Moderate Democrats" are for messing sith SS?

Hardly, the only place attacking SS is considered "moderate" is in the fetid corporate whore greenhouse of Washington, best exemplified by just about any spokesman of their handmaiden the Washington Post.

Apr. 19 2011 10:20 AM
RJ from Prospect Hts

Why on earth would we pay attention to the S&P? All of these numbers and formulas inevitably work to the advantage of those who already have wealth--inflation is bad, deflation is bad, etc.--and when numbers are confusing they're attributed to emotion--"confidence" (how is this measured? numbers?) is down; the market is "nervous" (increased Valium sales?) ... This is like lottery--pick specifically number balls or words into the bin, shake it up, and pull out a few to explain--and gin up--the current man-made hysteria. What's happening in Ache or Ivory Coast or Burma or the outer, poverty-stricken areas of New Orleans these days? Oooops; real news.

Apr. 19 2011 10:19 AM
Chris from NYC

It certainly is a bit rich for Republicans to seize upon the S&P downgrading as evidence that their economic policies are valid. Given that the massive Bush tax cuts advocated by the Republicans have played a huge role in creating the current debt trouble, and given that the Republican response to the current trouble is more tax cuts, listening to the Republicans right now would be akin to calling an arsonist and asking him to put out the fire he started.

Apr. 19 2011 10:16 AM
Jason from Secaucus

How much credibility should we be giving these rating agencies given their involvement in the housing bubble?

Apr. 19 2011 10:14 AM

Ummm, well I'm surprised it took this long.

Apr. 19 2011 10:07 AM
Martin Chuzzlewit from Manhattan

The International Monetary Fund now calculates (WSJ, April19, page 6) that the debt to GDP ratio of the U.S. is now higher than France, Germany, U.K., Brazil, Canada,Australia, Argentina or Spain(!). No word vs.Greece or Portugal.

Is the Community Organizer-in-Chief paying attention?

Apr. 19 2011 09:56 AM

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