Frame Game

Revenge of the Middle

The S&P downgrade is the beginning of the end of the left-right war. And both sides will lose.

The New York Stock Exchange just before the Aug. 5 closing bell

If you’re an American, you probably fall into one of three categories. You’re a passionate, confident liberal who reliably votes for liberals. Or you’re a passionate, confident conservative who reliably votes for conservatives. Or you’re a moderate who, lacking confidence or passion, doesn’t reliably vote.

Over the years, politicians have evolved to fit this divided electorate. Republicans cater to the right. Democrats cater to the left. Nobody caters to the middle, because the middle doesn’t put its foot down.

Until now. A centrist constituency with real power is finally emerging. It isn’t a party or a movement. It isn’t even American. It’s our creditors. The people from whom we borrow the money to live a deluded life of entitlements and tax cuts are telling us that the party is over.

Their message was delivered on Friday by Standard & Poor’s, which issues global credit ratings. S&P is downgrading the U.S. because our debt is out of control. The company explains:

When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers—Canada, France, Germany, and the U.K.—… the trajectory of the U.S.’s net public debt is diverging from the others. … in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

In other words, it’s safer to invest in these countries than in us. If investors agree, there goes our gravy train. To keep borrowing money, we’ll have to pay higher interest. Loans will become more expensive, the economy will slow, and our debt will increase in a vicious circle. No anti-tax or Medicare-protection pledge will stop this merciless strangulation.

Our politicians, still catering to the right and left, are reacting to the downgrade by blaming each other. They aren’t getting the message. The debate between higher taxes and deep entitlement cuts is over. Our creditors are going to make us do both.

The $2 trillion deal we just agonized over is peanuts. S&P projects that U.S. debt will reach 85 percent of our gross domestic product within a decade, and we’re approaching an “inflection point on the U.S. population’s demographics and other age-related spending drivers,” which will accelerate our insolvency. In case you missed the implicit message of “demographics” and “age-related,” the company spells it out: Last week’s debt agreement “envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”

Translation: Medicare will be cut deeply, no matter what Democrats say.

But that’s only half the story. S&P says it also revised its rating because its projection “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 …”

In other words, the GOP’s hard line against taxes helped to trigger the downgrade. And for any Republican too obstinate to see this message, S&P issues a further warning: To avoid a second downgrade, we’d probably have to generate “$950 billion of new revenues” by letting “the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”

Translation: Taxes will go up, no matter what Republicans say.

Beyond the math, S&P flunks our political system:

[W]e have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration … to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon. … 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 statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

There’s nothing new in this critique. Impotent windbags like me have bitched about our polarized politics for years. But the critique is no longer coming from impotent windbags. It’s coming from the people who control our cash flow. They’ve watched in dismay as politicians in the debt-ceiling fight played political poker with our creditors’ money. They’ve had enough.

S&P’s condemnation of politicians who use the debt ceiling as political leverage clearly applies to congressional Republicans. Throughout the debate, House Speaker John Boehner described a debt-ceiling increase as a favor to President Obama: “He gets his increase in the debt limit” in exchange for meeting Republican demands on spending cuts without tax hikes. After Obama capitulated, Senate Minority Leader Mitch McConnell boasted that the deal “creates an entirely new template for raising the nation’s debt limit. … Never again will any president from either party be allowed to raise the debt ceiling … without having to engage in the kind of debate we’ve just come through.”

That’s the kind of brinksmanship S&P is talking about. Paying our debts isn’t a favor to the president. It’s an obligation to our creditors. And if we’re going to play poker with their money every time we approach default, they’re going to shift their investments to France or Canada.

Politicians, like the rest of us, don’t heed such perils until they start to hurt. The S&P downgrade is our first taste of pain. Other credit raters and markets will follow. The only way to limit the pain is to make our country a better credit risk by electing and supporting politicians who put debt control before entitlements and tax cuts.

There used to be many such politicians in Congress: people like Bob Dole, Howard Baker, Alan Simpson, and Lloyd Bentsen. Few remain. Fortunately, one of them has moved on to a more important job: He’s the president of the United States. Throughout the debt fight, he’s been scorned by the left for seeking consensus on default avoidance and debt reduction, even if it means entitlement cuts without tax increases. In other words, he’s doing what S&P says politicians should do. He’s willing to lose for the greater good.

I hope the partisans in Congress will join him. If they don’t, I hope we elect new people to Congress who think more like him. But if we don’t, and if we replace him with somebody who puts tax cuts before debt reduction, that election—the ultimate unfunded mandate—will soon be overridden by the pain of further credit downgrades and interest rate hikes. The middle, in the end, will rule.

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