At the end of last week, Standard & Poor’s (S&P), one of the three major credit rating agencies, downgraded the credit worthiness of the United States for the first time and specifically stated that allowing the Bush tax cuts to expire for the wealthy would justify a return to the highest possible rating.
S&P’s report says that its “upside scenario,” which could allow the rating to be upgraded to “stable” “incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”
S&P: The Broken Clock
Of course, S&P is right that allowing the Bush tax cuts to partially expire for the rich (at least) would improve our fiscal situation. But S&P’s accurate observation on this point is akin to the broken clock giving the correct time twice a day.
It’s worth pointing out that this is one of the rating agencies that convinced an awful lot of people that mortgage-backed securities were perfectly safe in the run up to the economic collapse that triggered bank bailouts by the Bush administration. Investors seemed entirely unconvinced by the report on Monday, when they traded in stocks and bought up the very Treasury bills that S&P claims now carry some risk of default. Some observers have even suggested that S&P’s downgrade is a threat to prod Congress and the Administration to undo the stricter regulations on credit rating agencies that were enacted as part of the Dodd-Frank financial reform.
Perhaps the most damning indictment of S&P’s report is the $2 trillion mistake that the Administration identified, which S&P responded to by simply changing the rational for its downgrade from an economic one to a political one. S&P told the Administration that the $2 trillion mistake did not substantially alter its conclusion. But as observers have noted, the report makes clear that ending the Bush tax cuts for the rich (which would only save $950 billion) would alleviate the need for the lower rating.
Stating the Obvious: Congress Is Dysfunctional and Held Hostage by the Tea Party
All that being said, the report’s conclusions about America’s politics are correct, if rather obvious. “The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” the report admonishes. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
Of course Congress is less effective than ever. In fact, it’s utterly dysfunctional. No legislation of any significance can be passed in the Senate without a supermajority of members in support, which has not been the case historically (contrary to what many believe). As a result, President Obama’s proposal to extend the Bush tax cuts entirely for all but the richest two percent failed to pass last year despite support from a majority of the House and a majority of the Senate.
Now Republicans have established that they will vote against any increase in the debt ceiling (which is comparable to refusing to pay a credit card bill after you knowingly made half your purchases on it) unless they receive major policy concessions that most Americans do not support.
Tea Party lawmakers are willing to hold the legislative process hostage. In fact, the Republican Senate leader now uses the words “hostage” and “ransom” to describe the party’s legislative strategy regarding debt ceiling negotiations. House Republican Whip Eric Cantor responded to S&P’s report by exhorting his party to hold firm against any proposal to raise revenue.
Despite the many shortcomings of S&P, last week’s downgrading of the U.S.’s credit rating ultimately is the Tea Party Downgrade.