Full faith and credit

For some reason, S&P has growing confidence in American politicians


The US’s debt rating has never been about debt. It’s always been about politics.

Ratings agency Standard & Poor’s just upgraded its outlook on the US government’s debt (which is not the same as the credit rating itself) from “negative” to “stable.” And it’s true that the basic numbers are better. Revenues are up thanks to an improving economy—not to mention the payroll tax increase and expiration of high-income tax breaks at the end of last year—as well as decreased spending thanks to the oft-cited sequester. The Congressional Budget Office confirmed the rosier trends in American finances last month. Here’s the key chart which shows spending decreasing from historically high levels, and revenues rising, at least for the next handful of years.

But remember, it wasn’t the level of debt that prompted S&P’s downgrade of the US credit rating in August 2011. No, it was the chaotic budget ceiling debate, which brought the US far closer to defaulting than many thought possible. As S&P said in 2011:

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…

Likewise, today’s upgrade on the outlook reflects optimism. S&P thinks the US political machinery will work somewhat more smoothly when the US debt next approaches the debt ceiling—expected sometime in September. Here’s a key segment of S&P’s report today:

We see tentative improvements on two fronts. On the political side, Republicans and Democrats did reach a deal to smooth the year-end-2012 “fiscal cliff”, and this deal did result in some fiscal tightening beyond that envisaged in [Budget Control Act of 2011], by allowing previous tax cuts to expire on high-income earners. The [Budget Control Act] also has engendered a fiscal adjustment, albeit in a blunt manner. Although we expect some political posturing to coincide with raising the government’s debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending–which could be disruptive–let alone debt service.

Translation: S&P doesn’t see a replay of the debt ceiling debate this fall.

We’re more skeptical. Though the sequester is now seen as something of a policy-making “success,” it only occurred because of a series of abject failures to find a negotiated solution. Those failures include president Barack Obama’s National Commission on Fiscal Responsibility and Reform—known as Bowles-Simpson—and the so-called super committee of budgetary wonks who were supposed to come up with alternatives to the sequester, and failed. Those failures effectively forced the sequester to kick in. But they give little confidence that politicians in Washington are entering a new age of cooperation.

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