Random thoughts on the bond downgrade

Smarter people than I have already shared a lot of smart commentary.  Of course, presumably some people actually care what I think, which is why you are reading this.  So…

1) Who the hell is S&P to downgrade our debt.  Yeah, I know a bond-rating agency, but these are the same guys who were saying bonds made of $500,000 mortgages owned by people on janitor’s salaries were AAA.  Also, it’s one thing to rate some company that most people really don’t know about, but its pretty easy for investors to make their own independent decisions about the safety of US debt.  By pretty much all indications, investors consider the US debt as safe as ever.

2) That said, S&P had a fair point, but it is entirely a political point more so than an economic one.  Of course, our country’s economic situation right now is being held hostage to politics.  Ezra had some really nice commentary on this.

3) Wow is so much of the reporting on this epically bad.  Lots of reports about how the worst possible consequences are the likely consequences.  For one, I’ve seen very little mention of the fact that of the 3 major bond rating agencies, 2 still have us at AAA.  Likewise, little on the fact that there’s really not a lot of economic distance (plenty of psychological distance) between AA and AAA.  I heard a really good Planet Money podcast a few weeks ago that made a strong case that a bond downgrade might have surprisingly little macro-economic effect.  To quote John McCain, “the fundamentals of the economy are strong.”  Oh, yeah, it certainly sucks now, but there really is no question that– unlike Spain or Ireland– we have the economic ability to pay off our debt.  It’s the political ability that’s the problem.  This is 99% a political story.  Really like Kevin Drum’s take on why S&P is wrong.

4) So tired of the false equivalency– i.e., we know the solution– Republicans need to agree to more revenue and Democrats need to agree to entitlement cuts.  No!!  We are at historical lows of revenue and tax rates in the post New Deal era.  If anything is “out of control” it is out of control low revenues.  We’re not spending like crazy–mostly.  Except, of course, on health care.  Again, it’s a health care costs issue, not an “entitlement issue.”  I can think of one political party that’s trying to do something about health care costs.  And, of course, when they cut Medicare in the ACA, Republicans demagogued this to death.  Dems are trying to make progress on the entitlement issue by addressing health care costs and Medicare reform (real reform, not Paul Ryan’s major cuts posing as reform).  Social Security is a modest bump in the road in comparison.  So tired of reporters and media elites not getting this.  Heck, Obama (foolishly) was even willing to raise the Medicare age.  So, enough of this totally factually false bit that Democrats are just as intransingent on entitlements as Republicans are on revenue.  Not true!

5) Well, since the post is already long, what’s the harm in a little longer.  My favorite commentary is from Daniel Gross:

It has long been obvious to all observers — to economists, to politicians, to anti-deficit groups, to the ratings agencies — that closing fiscal gaps will require tax increases, or the closure of big tax loopholes, or significant tax reform that will raise significantly larger sums of tax revenue than the system does now. Today, taxes as a percentage of GDP are at historic lows. Marginal rates on income and investments are at historic lows. Corporate tax receipts as a percentage of GDP are at historic lows. Perhaps taxes don’t need to rise this year or next, but they do need to go up in the future…

But Congressional Republicans deserve much more of the blame. For this calamity was entirely man-made — even intentional. The contemporary Republican Party is fixated on taxes. It possesses an iron-clad belief that the existing tax rates should never go up, that loopholes shouldn’t be closed unless they’re offset by other tax reductions, that the fact that hedge fund managers pay lower tax rates than school teachers makes complete sense, that a reversion to the tax rates of the prosperous 1990’s or 1980’s would be unacceptable.

In the past two years, this attitude has combined with a general hostility to playing ball with Democrats on large legislative issues, a near-blanket refusal to conduct business with President Obama, and, since the arrival of the raucous Tea Party freshman, a cavalier attitude toward the nation’s obligations. It was common to hear duly elected legislators argue that it wouldn’t be a big deal if the government were to pierce the debt ceiling and default on its debts.

Amen.  Perhaps the unofficial mantra of this blog should be “raise my taxes.”  Or how about “raise my taxes, but raise them even more on rich people”?  Anyway, hopefully the impact of this downgrade is more toward the milder end of negative possibilities, but I truly believe that more than anything this is an indictment of the damage Republicans have done to our political system.

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About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

2 Responses to Random thoughts on the bond downgrade

  1. David says:

    agree wholeheartedly on that last sentence. I was initially frustrated with the debt ceiling deal but became utterly disgusted when I found out that graduate students are going to be asked to pay interest on debt while in school….call that what you want, it’s effectively a tax increase!

    • Steve Greene says:

      Whoa!! I didn’t even realize that bit about student loans. That’s ridiculous! And would’ve cost me a ton of money when I could least afford it back in the day.

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