America Loses AAA Credit Rating

August 11, 2011

Well, it finally happened:  Standard & Poor’s, one of the big three credit-rating agencies in the United States, has downgraded the United States’ credit rating.  Specifically, S&P downgraded the federal government from AAA to AA+.  “The outlook on the long-term rating” is also “negative”, meaning that S&P may lower our rating again “within the next two years” if we don’t shape up and get the national debt under control. 

In other words, if the United States were a person, imagine that he has already maxed out several credit cards, and now he’s applying for another one so that he can keep on spending.  Because he’s starting to look like a bad credit risk for lenders, his credit score has been lowered, and he’ll find it more difficult to take out loans or get approved for additional credit cards.

(It’s not exactly like that, of course.  For a full explanation of what the downgrade means, see the current issue of National Review, Kevin D. Williamson, “Downgraded President”, August 15th, 2011, page 20.)

As the author of the Foxhole says, “You knew this was coming.”  Except that if you don’t consume conservative media, you may not have known.  Conservatives have been concerned for decades about the inexorable growth of government over the course of the twentieth century.  Glenn Beck predicted this downgrade in February of 2008 (from about 3:25 to 4:35 on the video, or see block quote further down on the page).  Kevin Hassett warned of the danger in National Review last February.  Last month Mark Steyn said, “Downgrade’s a-comin’.”  A writer at The American Spectator pointed out last month that Egan-Jones (one of the ten American credit-rating agencies, though not one of the “big three”) had already downgraded the United States, and that liberal newspapers like The Washington Post didn’t seem to think that was worth mentioning.  Treasury Secretary Tim Geithner said in February of 2010 of a U. S. downgrade, “that will never happen”, and said last April that there was “no risk of that”.  People who got all their news from The New York Times thought the national debt was no big deal.  Mark Steyn remarked,

[Senate Majority Leader Harry Reid] and too many other Americans seem to be living their version of the old line: If you owe the bank a thousand dollars, you have a problem; if you owe the bank a million dollars, the bank has a problem. America owes the world $14 trillion, so the world has a problem.

I’ve said it before and I’ll say it again:  If you want to know what’s going on, you really must consume a balanced diet including at least some conservative media.

It’s not known exactly what effect the downgrade will have, but it’s almost certain that the United States will start having to pay higher interest rates on its debt.  (See the two Kevins cited above.)  Interest payments on the existing debt already consume more than a tenth of the total federal budget, and that’s at historically low interest rates; in the natural course of things, interest rates were bound to swing back up sooner or later anyway, and the downgrade can only make our interest rates rise even more.  This could make interest payments eat up an even larger share of the budget, which would make us less able to keep up with interest payments, which would in turn lead to further downgrades, in what could become a catastrophic debt spiral, or death spiral.

S&P mentioned that it downgraded the U. S. partly because we haven’t yet shown that we can “contain[] the growth in public spending, especially on entitlements”.  The debt keeps getting bigger; we have to do something about that.  S&P doesn’t necessarily favor spending cuts over tax increases as the means to make ends meet:

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

However, as I’ve pointed out before, no feasible amount of raising taxes would go more than a fraction of the way toward eliminating the deficit:

Importantly, such projections (perhaps necessarily) are also “static”, meaning that they assume all other things (other than the tax rates) would be equal; of course all other things are never equal, and raising the tax rates would almost certainly hurt the economy and thus depress tax revenues relative to these projections, making them even less able to cover the deficit.  As even President Obama has agreed, “The last thing you want to do is raise taxes in the middle of a recession . . . .”

So raising taxes won’t do it.  We need to cut spending, a lot.

Liberals, including in the Senate and the White House, responded to the downgrade by blaming, incredibly, the Tea Party, the people trying to cut spending and reform entitlements.  The Democrats, and especially the president, have done a terrible job on both counts.  The National Review editors offer an excellent review of the relevant recent history.

In other words, not to put too fine a point on it, if you don’t want to destroy America, please stop voting for Democrats.

For whatever it’s worth, since the downgrade, it’s been a crazy few days on the stock market.  Follow the developments there, if you’re so inclined, at (appropriately named for a roller coaster) Yahoo.

22 Responses to “America Loses AAA Credit Rating”

  1. snoodickle Says:

    I watched Glenn Beck every day for a year straight, so I got my fair share of fair and balanced media!

  2. swissecon Says:

    Thank you for the interesting post! But please be aware of the fact that the WSJ has added a remark to its article. It says:

    “An earlier version of this story incorrectly stated that the total taxable income of Americans earning over $100,000 in 2008 was $1.582 trillion. The correct figure is $3.4 trillion.”

  3. snoodickle Says:

    Your article fails to mention that the other two big credit agencies did not downgrade the United States’ credit rating. So, 2/3 of the major credit rating agencies still view the United States as one of, if not the, most credit worthy nation in the world. This leads to one conclusion – Standard & Poor’s is trying to raise its profile by making a crazy move.

    • “Your article fails to mention…”

      If you’re trying to imply that I was anything less than fully honest and responsible, I disagree. I explained that S&P was “one of the big three credit-rating agencies”; by not saying that either of the other two had also downgraded the U. S., of course I was saying that they hadn’t (yet).

      As for the substance of your comment, I disagree. I think a lot of people would say that S&P and other credit-rating agencies have indeed erred, but on the side of rating countries too high, especially the United States. Mark Steyn is the URL I can give you off the top of my head, but I’m sure he’s not the only one I’ve heard.

      • snoodickle Says:

        The United States has never defaulted. Not once. What exactly does it take to earn the highest credit rating? Defaulting -7 times? Is that even logically possible?

      • It’s a silly question. Do you expect all the world to pretend that everything is fine right up until the moment the United States actually misses a payment? If not, how high would our debt have to get before you think it would be acceptable for the world to acknowledge that there’s a problem?

        Anyway the United States will never “default”, probably no matter how bad things get. That’s not how it works. It will inflate its way out of debt, though, to a greater or lesser extent, which is very bad both for our creditors and for us.

      • snoodickle Says:

        So you’re admitting the United States will never default. Hmmmm.

      • I don’t think you understand. (Again, maybe this wouldn’t all be new to you if you consumed any conservative news media.) Let me explain.

        If you or I owe a million dollars, that’s tough, because we have to pay it back, or else we’ll fail to pay it back.

        If the United States owes trillions of dollars (and the instruments of debt are denominated in dollars), the United States is different from us individuals in that the U. S. can print more dollars. In theory, the number of dollars the government can print is infinite; so the U. S. can always print enough dollars to pay all its debts.

        Except that this isn’t a game; our actions have real consequences. Printing more dollars like that means inflating the currency, which means that the U. S.’ creditors get back money that’s worth a lot less than they expected. You might say that an implicit condition of their lending us that money in the first place was that we wouldn’t make it worthless by the time we paid it back. To the extent that we inflate our way out of debt, that makes creditors that much less likely to lend us any money in the future, much like a literal default.

        Inflation also has consequences for us, individual Americans. At the extreme end of the continuum, it produces a situation like that in Zimbabwe, or in Weimar Germany, where the old joke is that you used to go to the store with your money in a little bag and buy a cartful of groceries, but in the grip of Weimar-level inflation, you would need a shopping cart full of money to buy a little bag of groceries.

      • snoodickle Says:

        Why do you always say I don’t understand when you know I do?

        (1) Your entire comment was nonresponsive. You admitted the United States would “never default,” (your words, not mine) I pointed out your admission, and you immediately got defensive and angry.

        (2) The United States does not have to print money to pay its debts. Indeed, the primary reason the other two credit rating agencies did not downgrade our creditworthiness is because we have unparalleled access to financing. Now you might respond that continuing to finance debt with more debt is a bad idea, but that does not mean we are at risk of defaulting/inflating our currency any time soon. Eventually, once we finish fighting wars, raise taxes, and reform entitlements, the budget will be balanced.

      • Why do you assume people who explain where you’re wrong must be angry with you?

        I was neither angry nor defensive. The fact that you think I was angry makes you sound defensive. I don’t know what you mean by “nonresponsive”. You’re the one who brought up “default”; the word doesn’t appear anywhere in my original post.

        I don’t have time for your games. This is my last comment on this post.

  4. Tevyeh Says:

    A few issues:

    1) S&P’s report emphasizes that the political brinkmanship leading up to the debt ceiling bill was a major factor in the downgrade. That the federal government *currently* has the ability to satisfy its obligations is not in dispute. I’m glad that our illustrious leaders decided not to drive us off the cliff THIS time, but they’ve signed us up for another game of “chicken” in 2013.

    2) That said, I agree that Uncle Sam is on track for insolvency and would soon merit a downgrade even in the absence of a statutory debt limit. However, I’m going to challenge the following statement:

    “…no feasible amount of raising taxes would go more than a fraction of the way toward eliminating the deficit.”

    I often criticize liberals for opposing this-or-that spending cut on the grounds that “it’s a drop in the bucket” (e.g. “We shouldn’t cut farm subsidies because they’re less that 1% of the federal budget.”). It’s not hard to recognize the fallacy here. A dieter cannot reach his weight loss goals by foregoing any particular donut, but that’s no reason to keep on eating donuts. Or, as I once heard Professor Bryant say, “a billion here and a billion there, and pretty soon you’re talking about real money.”

    The same logic applies to revenue increases. A “fraction of the way toward eliminating the deficit” is an enormous amount of money. If the denominator of said fraction is fewer than one or two orders of decimal magnitude larger than the numerator, such an increase would go a long way towards both short and long term fiscal solvency.

    Another point: “eliminating the deficit” is not absolutely necessary, and I don’t think it should be our short-to-medium range target. If we can get the deficit down to, say, Bush’s worst year, then we’d probably be out of the danger zone. To be perfectly honest I’m not sure what level of deficits would be sustainable, but suffice to say it’s somewhat higher than zero. Any significant amount of debt increases would continue to be a drag on long-term economic development, but I think the first priority should be to get us out of danger of default.

    I am extremely frustrated with the GOP for opposing any and all revenue increases, regardless of source. I often criticize liberals for an inability to distinguish between tax cuts and tax credits, or for viewing a tax cut as the functional equivalent of a handout. Here’s my issue: many of the tax credits, deductions, and exemptions the GOP is fighting tooth-and-nail to preserve ARE the functional equivalent of handouts! There are many, many inefficient little boondoggles in the tax code that could be eliminated or reduced in a way that significantly increases revenue, without causing the kind of economic distortions that we’d see from a rate hike. In fact, we’d actually be getting rid of some distortions.

    • (1) Maybe you and Thomas Sowell are right that having a legal debt ceiling in the first place does more harm than good—among other things, it encourages these dangerous games of “chicken”, as you both say.

      That said, I hate it when people come to a situation in which one side is clearly more right than the other and try to be “fair” by blaming both sides for “bickering”.

      — The Republicans were trying to cut spending deeply, start to implement structural reforms, or both; they were making serious efforts to save America from the desperate situation she has put herself in. Given that there is a debt ceiling, I think it’s reasonable for Republicans to use the occasion of raising it (which, I agree, had to be done) to try to fix the long-term problems that make us keep incurring more debt (and having to raise the ceiling) in the first place.

      — The Democrats’ contribution to the debate consisted mostly of shooting down the Republicans’ proposals, including duly passed bills, while (incredibly) accusing the Republicans of obstructionism.

      People can disagree about exactly how much Republicans should have leaned toward trying to fix the problem, and how much they should have leaned toward simply raising the debt ceiling (a “clean” bill) to avoid any uncertainty about default (though even eighty of the Democrats in the House voted against the “clean” debt-ceiling increase?), but I think it’s very unfair to sum up this whole sequence of events by saying that both sides engaged in “brinkmanship”. (I realize that that’s S&P’s analysis, not just yours.)

      (2) I agree with a lot of what you’re saying about the tax code: It should be simpler, the government should stop trying to use a lot of little “credits” and “deductions” to manipulate our behavior, etc.

      At the same time, I’m mostly with the Republicans on their steadfast refusal to cooperate with any tax increases. I’m told that Republicans have tried this sort of thing before—Democrats agree to three dollars of spending cuts for every dollar of tax increases, or whatever the deal might be—and then the tax increases always end up being real, but the spending cuts turn out to be mostly illusory, or mostly empty words, or mostly a lot easier to reverse than the tax increases. It’s a bad deal.

      The government is already way too big and taxes are already way too high, and it’s no use wishing we could “get the deficit down to, say, Bush’s worst year”, because the entitlements constitute a structural problem that is already serious and getting much worse over time. If we can’t reform entitlements, spending will keep growing and growing, and it will become less and less possible to pay for it by raising taxes even if we wanted to. While Republicans try to reform entitlements, deep cuts in other spending could also be a big help, but I don’t think Republicans should even consider cooperating in tax increases (whether in rates or in eliminated deductions—anything that takes more money out of the private sector) unless they can get in exchange (first, or else in a way that’s really enforceable, I suppose) deep, real spending cuts, or structural reform, or both. Tax reform, as important as it is, doesn’t count.

  5. egotistic Says:

    Taxes are at one of the lowest rates they ever have been; especially when one considers the capital gain tax rate which simply allows the rich to get richer through property and stock investments.

    As to your comment about liberal news; the liberal news was talking about the debt ceiling at the same time as conservative news. The only difference is conservative news takes a much more radical and doomsday approach, but what else is new. My favorite is Drudgereport when the market is declining. Drudgereport will always show a big graph at the top showing the slide, but when the market goes up they don’t even mention it. I am sure they would mention the increase if a Republican was in the white house but as always, Conservative news is much more negative and jaded.

    • “Taxes are at one of the lowest rates they ever have been; . . . .”

      You’ll recall that the modern federal income tax was enabled only by the Sixteenth Amendment, right before the First World War—i.e., America didn’t have it for the first century and a quarter of her history. Apparently there were some attempts at a federal income tax in the late nineteenth century, but they were in the range of 2-5%. The current top marginal income-tax rate is 35%. You’ll notice that that’s a lot higher than 5%, or the 0% that existed at the country’s Founding. The fact that the top marginal rate was higher at certain points in the twentieth century (70%, even 90%) doesn’t change the fact that the current rates are way too high.

      Importantly, the size of government itself has been going up for a long time. For some historical perspective on that, I recommend that you read the beginning of my blog entry on the subject, and follow the links to my sources. As I put it then, no matter how you measure it, the government keeps growing. How big would it have to get before you would agree that it was a problem?

      As to the news media, I’m not a regular consumer of the Drudge Report, but from what I know of it, I’m happy to agree for purposes of argument that it’s sensationalist. If you don’t like it, dump it and start consuming some serious, intellectual conservative media, such as National Review Online. (There you’ll actually get some discussion of ideas. I don’t know whether seeing a graph at the top of a Web page counts as reading conservative media.)

      On the other hand, you characterize conservative media as having a “radical and doomsday approach”. Maybe that’s part of what I’m talking about, except that I would put it more like this: The conservative media take real problems seriously, such as the national debt. They’ve been talking about the possibility of downgrade or other consequences since long before “liberal news was talking about the debt ceiling”. Even during this recent debt-ceiling fight, the liberal media tended to make it sound as if the responsible thing were to pass the debt-ceiling increase, as if the only thing that could lead to downgrade would be a failure to raise the debt ceiling. Then Congress raised the debt ceiling and we were downgraded anyway. That means that even as recently as the debt-ceiling fight last month, the liberal media were still getting it wrong, and the conservative media were right again: The national debt itself is a big problem, and it needs to be addressed.

  6. snoodickle Says:

    Which is the bigger problem, the national debt or unemployment?

  7. […] the rest of voters in their own income bracket), even moral virtue (e.g., by Paul Krugman and Snoodickle, and Snoodickle […]

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