Posts Tagged ‘Felix Salmon’

The Tea Party Downgrade

Sunday, August 14th, 2011

In a recent flurry of e-mails with my conservative uncle, we have been arguing about who is responsible for the S&P downgrade of US debt. While it should be obvious to everyone but the Fox News addled that Congressional Republicans are responsible, the back and forth with my uncle has convinced me that this apparently needs some more explanation.

First of all, let’s stipulate that the idea of a debt ceiling doesn’t make a whole lot of sense. Congress and the President are responsible for appropriating money and (much to the chagrin of the Tea Baggers) borrowing money is a part of running a government. A separate debate and vote on whether the government can borrow money to spend funds that have already been approved is superfluous. Not to mention the fact that the most reactionary budget that has come out of the House of Representatives in recent memory, the Ryan Plan, assumes a deficit for this year (and indeed a deficit for over ten years). Furthermore (although the Tea Party Constitutional fetishists have been adept at ignoring it) the Constitution is pretty clear on this. Section 4 of the 14th Amendment reads:

the validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for service in suppressing insurrection or rebellion shall not be questioned.

In my opinion, Obama took this Constitutional arrow out of his quiver too soon. While it would set a bad precedent to just ignore a practice that has been in place for decades, he should have reserved his ability to invoke this power in the time of a crisis.

The debt ceiling has been raised 106 times since 1940 and the historical precedent is that the “out party” (who doesn’t control the presidency) votes against it as soon as they know that there are enough votes to pass it. Again, Republicans are shocked (shocked, I say!) that there might be politics in Washington DC and point to the fact that Obama and Biden both voted against it during the Bush Administration. In return, Democrats saw their Barack Obama and raised them a Ronald Reagan, who raised the debt ceiling 18 times in 8 years and in 1987, in a speech that could have been given by Barack Obama, publicly called on the Democratic Congress to stop acting irresponsibly and raise the debt ceiling. 

But this time was different. It was different because the 2010 elections brought to power a bunch of Tea Party Congresmen who cared more about their extreme policy prescriptions than they did about the fragile economic recovery of the United States. The US Government’s much vaunted “checks and balances” are basically a way to insure compromise in lawmaking. But the opposite is true as well: checks and balances also provide an easy way for one faction to grind the system to a halt by refusing to compromise. And this is exactly what the Tea Party has been intent on doing.

Just as they forced a crisis when the Bush Tax cuts were set to expire in 2010, and then again earlier this year when the remaining money from last year was to be appropriated, the Tea Party was set on using the Full Faith and Credit of the United States as a political weapon. The initial Republican plan was to tie the US Government in knots over the debt ceiling to force spending cuts, while only extending the debt ceiling for another 6 months, thereby creating another opportunity to tie the government in knots 6 months later. This is from the same people who talk about the “uncertainty” caused by Democrat’s attempts to regulate the economy or raise enough money to finance the meager social programs we have in this country. What could lead to more uncertainty than questioning whether the largest economy in the world would pay the debts it had run up?

As if that wasn’t enough, the Republicans added the demand that not only did the deficit have to be cut, it had to be cut without raising taxes at a time where taxes are lower than they have been in 60 years.

Faced with this extraordinary economic extortion, Obama called the Republicans’ bluff. He unilaterally put the two most popular social programs in the country on the table and began to push for a deal that would cut the deficit $3-4 trillion over the next 10 years. The catch was that the Republicans would have to agree to tax increases in order to get these cuts. To be sure, this was political gamesmanship too, but it was about time. Obama has been pummeled by Republican political gamesmanship for the past 3 years, and in this case, the right political position also happened to be the right position for the country (not to mention supported by over 2/3 of the American people).

Republicans counter that Obama wasn’t serious about deficit reduction since he never submitted a detailed proposal, but (for better or worse) that’s the same thing he did during the Health Care debate and no one can question his commitment to that policy after witnessing his determination to push it through. Ultimately, Obama was expecting the usual rules to apply here: The Republican House comes out with something reactionary, the Senate moderates it, cooler heads prevail and the President signs the compromise. That is how the system is supposed to work.

But the Tea Partiers aren’t interested in how the system works. They insisted on getting 95% of what they wanted and were ready to risk the position of United States as the economic leader in the world to get that 95%. Ultimately, the deal that was struck produced a lower deficit reduction than S&P said would be necessary to avoid a downgrade and put in place an unwieldy process where a super committee is charged with finding the savings. If they don’t materialize, automatic cuts in domestic and military spending will be enacted.

While this deal took the immediate threat of a default off the table, it provided less debt reduction than S&P had said it would take as a meaningful down-payment on the debt and provided yet another choke point for the Republicans to hold the country hostage to their extreme demands.

My conservative uncle makes the argument that the downgrade was caused by President Obama’s lack of seriousness when it came to tackling the debt, but that ignores the fact that the debt is a long term problem and that the only thing that made the debt problem a “debt crisis”  was the threat of the Republicans not to raise the debt ceiling and their insistence that any deficit reduction not include any additional “revenues,” no matter how small and insignificant they were.

But don’t take my word for it. Read S&P’s statement that accompanied the downgrade (italics added):

The political brinksmanship of recent months highlights what we see as America’s governance and policy making 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. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan 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.

In other words, if debt ceiling and threat of default weren’t used as “political bargaining chips” or if  the “Grand Bargain” of $3-4 trillion in debt reduction from spending cuts and new revenues that Obama was pushing for  was agreed to, the downgrade wouldn’t have happened.

In the aftermath of the downgrade, many attacked the S&P, noting that they and other ratings agencies that graded risky derivatives as AAA were in large part responsible for the economic crash that we are currently in. While this is clearly true, Reuters financial blogger Felix Salmon points out that, in this case, S&P was really just doing it’s job:

Any student of sovereign default knows that it is born of precisely the kind of failures of governance that we saw during the debt-ceiling debate. That is why the US cannot hold a triple-A rating from S&P: the chance of having a dysfunctional Congress in future is 100%, and a dysfunctional Congress, armed with a statutory debt ceiling, is an extremely dangerous thing, and very far from risk-free…We saw the values of Congress during the debt-ceiling debate, including various members of the House who said with genuine sincerity that they’d actually welcome a default. In that context, S&P’s judgment is hard to fault.

Indeed.