Consumer Comeback Blog

Who’s to blame for the U.S. credit rating drop?

With Standard and Poor dropping the U.S. long term credit rating from AAA to AA+, the future of borrowing for Americans just got a bit more bleak. Interest rates are projected to rise as a result, making it more expensive to take loans out to pay for college, buy a house or car, or even take a business loan. This effectively reduces the access to money for Americans making economic recovery that much tougher.

So who’s to blame for all of this? In reading the S&P statement it’s difficult to narrow it to one cause. No single person or group is entirely to blame and there’s certainly plenty to go around. Here are some of the suspects:

Wall Street and the Economy

There’s nothing easier to blame for government deficits than the current state of the economy. America is in a recession which means less tax revenue for the government forcing them to either reduce spending, increase taxes, or continue to spend beyond their means (or some combination of the three).

It’s hard to imagine that the U.S. would be in this situation had the mortgage and banking crisis never happened. Not only were the bank bailouts a large portion of the increase in public debt, but the following recession has been the worst since the great depression, and the recovery process has been slow if at all. Now thanks to the credit rating drop, it looks to be prolonged even more. If Wall Street isn’t among your list of groups to blame for the credit ratings drop, you might not fully understand how we got here.

Government spending vs. the debt limit

The U.S. Government has a debt of just over $14 trillion. And it’s growing. While the U.S. has almost always had public debt, in the past few decades, both public debt and trade deficits have increased dramatically fueled by expensive wars, an expanding government, and limited revenue. Both parties agree that making cuts to government spending is necessary to help balance the budget so that the U.S. doesn’t need to exceed its self imposed debt limit. Unfortunately, mutually agreeable cuts are not enough to prevent the U.S. from exceeding this limit. So in the meantime, the limit must be increased or face default.

A major part of the debate (and why it became a crisis) was whether or not to allow the U.S. to increase the debt limit unconditionally or to attach required additional spending cuts as a compromise. Failure to either balance the budget or raise the debt limit would result in defaulting on the country’s debt obligations. The results of defaulting would have likely been worse for the U.S. credit rating, but the very fact that it was so close to a reality is (in part) why the rating dropped despite the U.S. averting that undesirable scenario.

Republicans

The Republican stance to the debt limit was to allow only a dollar-for-dollar increase to the limit that corresponds with proposed budget cuts. Additionally, they were pushing for a balanced budget amendment to the Constitution forcing the U.S. to effectively stop deficit spending. Some Republicans have been trying to push this agenda for more than 30 years without success.

Finally, Republicans have refused to budge on the issue of tax increases, the most stern and successful of their stances. This stance and the Bush tax cuts were even specifically mentioned by S&P:

“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.”

Tea party principles adopted by the GOP have become a fiscally conservative policy to “starve the beast” limiting the spending power of Congress to reduce the growth of government. Politically bringing the debt limit to crisis level in order to force the opposition to negotiate with these political ideologies is a major reason why the economic future of the U.S. is unclear.

Democrats

The initial Democratic proposal on the debt limit was to have an unconditional increase without any spending cuts attached as has been done this way for years. They also wanted a large increase to the debt limit to support borrowing money until 2013. The problem was not all Democrats agreed and the bill was defeated 318 to 97 with 82 Democrats voting against it. Still, Democrats who supported this bill are criticized for unanimously voting against a clean increase in the debt limit when George Bush was president and the Republicans controlled Congress.

Another position widely favored by most Democrats was that they are opposed to major cuts to entitlement programs like Social Security, Medicaid, and Medicare. This stance was also specifically mentioned by S&P:

“…controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements… is less likely than we previously assumed and will remain a contentious and fitful process.”

It’s these stances and political polarization between the major political parties that are cited as a major reason for uncertainty when it comes to U.S. fiscal policies.

Obama

Obama is certain to receive a lot of the blame for the credit drop even if much of it isn’t directly his fault. As a President who inherited one of the worst economic situations in U.S. history, a lot of the initial causes for the crisis had little to do with him. Still, history remembers who was president when a crisis happens, and with the help of political posturing, associates it with their term.

Much of the current criticism of Obama, however, is in his inability to let the Bush tax cuts expire and end the wars in Iraq and Afghanistan (the top 2 contributors to the deficit in the last decade). And as promises made during his campaign for office, he’s yet to be able to follow through on either. Some argue that if he had kept true to these promises, the current situation might have been avoidable.  Even still, it is President Obama’s job to make Congress accountable for timely negotiations of a mutually acceptable deal.  And yes, the Republican party did not make this easy, so instead we get this:

Politics as usual

The budget control act of 2011 which passed Congress and was signed into law on August 2nd, 2011 may have delayed the debt ceiling crisis, but it didn’t end it. The bill specifies $917 billion of cuts over 10 years in exchange the initial debt limit increase of $900 billion ($400 B immediate increase, and a $500 B option for president Obama subject to a Congressional motion of disapproval). The bill then outlines a plan for finding another $1.5 Trillion in cuts by a legislative committee called the “super committee”. Depending on the cuts the President may request another $1.2 to $1.5 Trillion debt limit increase also subject to the same motion of disapproval. Finally, Congress is to vote on a balanced budget amendment (but it is not required to pass in order to have the debt limits increase). No tax increases were a part of the bill.

The biggest problem with this bill is that it’s not a final solution. Rather, it is a temporary extension of the issue so that some of the finer details can be worked out later. The major factor cited by the S&P for reducing the U.S. credit rating was political-financial uncertainty. The true culprit was the failure by our politicians negotiate a deal which would keep the U.S. from being in the same “crisis” in the near future. Political positioning by both parties are directly to blame.  In fact, both parties have been playing this game with our budget limit for the past 10 years.

Without political cooperation and some kind of middle ground, the U.S. probably won’t earn back its AAA rating.  Until a clear plan is set to turn the U.S. debt around, the road to financial recovery will likely be a long and (perhaps) painful one.  S&P got it right.

 

 

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