S&P Downgrades U.S. to AA+, Blames Political Brinksmanship

You can do one of two things with the news that Standard & Poor’s has downgraded the United States’s bond rating, dropping it below AAA status for the first time since 1941. You can stick to your nostroms – it’s the GOP’s fault, it’s the Democrats’ fault, if only we’d listened to the Tea Party, if only Obama had used the 14th amendment – or you can read what the gnomic ratings agency actually says.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

OK: The deal wasn’t big enough in the short-term. Advantage, Tea Party.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a  negative outlook to the rating on April 18, 2011.

That statement assigns the blame a lot more broadly. It’s Washington’s fault. It can’t make real deals. Democrats were willing to bend on entitlements during the “grand bargain” negotiations; Republicans were unbending on taxes. The last point is important, because S&P really opens fire on the Republicans.

Compared with previous projections, our revised base case scenario now  assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012,  remain in place. We have changed our assumption on this because the majority  of Republicans in Congress continue to resist any measure that would raise  revenues, a position we believe Congress reinforced by passing the act. Key  macroeconomic assumptions in the base case scenario include trend real GDP  growth of 3% and consumer price inflation near 2% annually over the decade.

This is not crazy. This what Republicans imply about the supercommittee – they will not accept plans that increase taxes, and despite the fact that they’ve agreed to let the Bush tax cuts lapse on January 1, 2013, they are making noises about not accepting a return of the rates. The best possible scenario, if we assume that stance, is what I wrote about today – tax reform plans that start in the supercommittee and win over a committed Congress.

We actually have all the tools we need to recover the bond rating. The question is whether our political actors do that, or whether they see the openings to craft political narratives. Obama shouldn’t have spent so much! (That spending included around $400 billion of tax cuts in the stimulus and $500 billion in the November 2010 Bush tax cut extension.) The Tea Party blew up the process! (More true – I don’t see how the passage of Cut, Cap, and Balance, with its requirement that the states force a Balanced Budget Amendment into effect over the next few years, after which point we need supermajorities for tax hikes… yeah, not quite sure how this gets us out of this!) It’s easier to imagine a round or 10 of political point-scoring than, for the first time, some sober assessment of what’s going on.