S&P Downgrades U.S. Credit Rating to AA+ Amidst Shambled Debt Deal

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Today’s market news can be summed up in one announcement.  Standard and Poor’s downgraded the U.S. credit rating.  The U.S. has lost its perfect credit score for the first time in over a century.  In response to the butchered debt deal signed into law on August 2, S&P issued a credit downgrade for the U.S. from AAA to AA+. The following are only key excerpts from the press release, the full text of which can be found here. S&P Downgrade of US Credit Rating (5 Aug.)

My contention is that the S&P downgrade is illustrative of the diminishing stability of the U.S. legislative process.  Consequently,  I have included key excerpts that highlight the degradation of the political establishment and its inability to legislate substantive policy due to an increasing divide between Parties.  While there is much more to discuss in the press release regarding the fiscal issues at hand, I find it critical to highlight the inability of the political establishment to perform its most basic functions.

Overview

We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

The debt deal, officially known as the Budget Control Act, only cuts $917 billion over the next ten years with cuts yet to be determined of up to $1.5 trillion.  S&P feels that cuts of $4 trillion are needed to start with in order to “stabilize the government’s medium-term debt dynamics”  In other words, the U.S. needs to reduce spending by at least $4 trillion now in order to keep its books from bursting into flames.

More broadly, 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 when we assigned a negative outlook to the rating on April 18, 2011. 

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

The short interpretation is that markets are beginning to feel the heavy hand of a highly dysfunctional U.S. government, prevalent in both its policies and its partisan bickering.  The differences between the Republican and Democratic parties are so great as to cast a shadow over the viability of an economic recovery and the solvency of the U.S. government.

Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged 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, or on reaching an  agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking 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.

The fact that our political establishment is becoming increasingly unstable – opposing parties residing at opposite ends of a lengthening political and ideological spectrum – sends signals that any policy reconciliations over government spending and programs such as entitlements (Social Security, Medicare, Medicaid) are not likely.  Moreover, the fact that Party politics resulted in using the threat of a default as a “bargaining chip” attests to the instability and recklessness of the American political establishment. Consequently, the hope of the U.S. government reaching a meaningful and lasting consensus of spending reduction is greatly diminished.

In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth… 

The political grandstanding and chicanery that has come to define Washington politics over recent decades damages confidence within the markets that any mutual agreement on reducing spending will be reached.

The Outlook

We view the act’s [Budget Control Act] measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future.

The structure of the Budget Control Act renders any solution to government insolvency largely to be determined.  The act does very little.  This reflects the typical legislative process in controversial matters, whereby the government passes legislation that seems to do a lot, just not right now.  The fact that some of the cuts occur over the next ten years, with the remainder yet to be determined suggests that political division has rendered substantive policy implementation untenable.  In short, our government is fragmented and has become legislatively inept, thus incapable of reaching consensus on important policy matters.

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CATO Video on Short-Comings of Debt Deal

It is critical that the American people understand the lip-service paid by the debt deal both between Democrats and Republicans and from Washington to the taxpayer.  As this video points out, the deal actually fails to cut spending.  The claim that the deal cuts spending by almost $1 trillion is not a cut at all.  In Washington-speak, a slowing of the rate at which spending grows is in itself considered a spending reduction, and that is precisely what the debt deal says.  Moreover, the cuts are not immediate, occurring over the next ten years under a completely different Congress not beholden to the policies of the present Congress.

The second major point CATO makes is that the additional $1.5 trillion in cuts to be determined by a bipartisan committee later this year acts simply to defer the “tough decisions” that have come to characterize Washington rhetoric in recent years. Washington speaks of the need to come together, to compromise.  Well it seems that Washington has succeeded in compromising itself into fiscal oblivion.

Regardless of party affiliation, please share this video to all you know.  It affects the future of all Americans, Republican or Democrat.

Income Inequality: Republicans and Democrats Agree, Less is More for the Middle Class

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Ever wonder who is telling the truth about the current state of economic affairs?  I tend not to take the word of media conglomerates, politicians, or even local media.  Government statistics such as the consumer price index (CPI) or the all-coveted unemployment rate tend to understate matters in the worst of times and overstate them in the best of times.  For these reasons and my eternal skepticism of politics in general, I do what most of us do: simply look at my situation and those who are closest to me. However, writing one’s representative with fragmented excerpts of living pay-check-to-pay-check fails to get the attention of Washington politicians.  Their rhetoric would have us believing the opposite, as they increasingly publicize two or three letters they received in a disingenuous attempt at connecting to the American people.  Just recently in a public address, Wisconsin Governor Scott Walker cited various letters he received from voters. Some of his transcript:

“I also understand how concerned many government workers are about their futures. I’ve listened to their comments and read their emails.

I listened to the educator from Milwaukee who wrote to me about her concerns about the legislation and what it might mean for her classroom.

That’s why last week we agreed to make changes to the bill to address many of those issues….

I understand and respect those concerns. It’s important to remember that many of the rights we’re talking about don’t come from collective bargaining. They come from the civil service system in Wisconsin. That law was passed in 1905 (long before collective bargaining) and it will continue long after our plan is approved.”

What changes?  The answer, which was not stated, lies with the state – “the civil service system.”  The interests are therefore those of the status quo, off-shoots of a 106 year-old law.  Yet Governor Walker will be extolled by his supporters for acknowledging the little people when all he acknowledged was the absence of change.  This technique is simply an appeal to the emotions of the people, giving an impression that elected representatives are acting on behalf of our best interests.  Yet, it renders listening to our politicians’ speeches an exercise in watching paint dry because they simply have no credibility left.  The reality is that legislation is primarily determined by a small elite constituent, not by the broad base of voters that placed the official into office.

Although America has changed a great deal since the Great Depression, microtrends responsible for the erosion of the middle class – such as the use of political rhetoric just discussed – have not.  Despite which party occupies the Congress or the executive office, over the past thirty to forty years wealth consolidation has sky-rocketed and government outgrowth now consumes many of our daily activities from the mundane issue of how much salt we should put on a steak to more fundamental issues such as privacy and health care.  Incremental policy changes is the name of the game in Washington, and when constitutionally volatile legislation such as the US Patriot Act is passed, it is typically done behind closed doors without knowledge or consent of the people.  For example, the Patriot Act was just extended for another three months, yet, the extension of legislation that erodes our basic civil liberties to a degree not seen since President Adam’s Alien and Sedition Acts (1798 ) was scarcely mentioned in the mainstream media.  Instead, our focus is redirected to the uprisings in the Middle East. Notwithstanding the importance of freedom in the Arab world, we must stay forever vigilant at home.  It was said upon the eve of our Revolution that “The proposal of any new law or regulation….comes from an order of men who….have generally an interest to deceive and even to oppress the public” (The Wealth of Nations, p. 174).  Smith’s statement is crucial due not only to its prescience to modern day events, but because it transcends party politics and partisan divides, something the American of average intelligence, caught in the traditional romanticism of party loyalties, seems unable to accomplish.  Until we can do this, which party is occupying the White House or controlling Congress will be of very little consequence to our liberty and that of our children.

Our tendency toward government involvement in economic affairs such as whether we choose to purchase health care, or whether McDonald’s is liable to law suit for not disclosing the fact that their food is unhealthy has grown beneath both parties and is fallacious at best.  What is most important – and what many Americans do not know – is that government expansion into our daily affairs began long ago with the progressive movement around the time of President Woodrow Wilson and has continued under both parties since.  The birth of progressivism was founded on a simple deception put over on the public, namely that private corporations, if left to the free-market, would grow too big and too powerful. Consequently, the government must regulate their growth so as to ensure an equitable balance among competing resources. Nothing is further from the truth.  What our schools, politicians, and the media neglected to mention – and still neglect to this day – is that massive growth in corporations such as Morgan’s U.S. Steel and Rockefeller’s Standard Oil was not achieved via free-market competition in the first place.  Rather, both parties granted government charters and subsidies, land grants to the railroads, and implemented tariffs restricting competition from foreign wares, all of which lead to a massive consolidation of wealth into a few mega-corporations.

“And so it went, in industry after industry – shrewd, efficient businessman building empires, choking out competition, maintaining high prices, keeping wages low, using government subsidies.  These industries were the first beneficiaries of the ‘welfare state’….Meanwhile the United States government was behaving almost exactly as Karl Marx described a capitalist state: pretending neutrality to maintain order, but serving the interests of the rich…the purpose of the state was to settle upper-class disputes peacefully, control lower-class rebellion, and adopt policies that would further the long-range stability of the system.”

A People’s History of the United States, pp. 257-58

So the public backlash that lead to progressivism’s call for government intervention was a result of discreet government influence in industry and commerce.  This is perhaps one of the greatest and most debilitating ironies in American history because it furnished the myth that the people must look to government for solutions to market imbalance that were first created by the government itself.  Moreover, we are seeing the long-term effects of this philosophy.  We know it today as the welfare state.

The results have been slow but persistent.  Not since preceding the Great Depression has income inequality been so drastic as that which preceded the Great Recession.  Whether or not a degree of causation exists between extreme income inequality and economic instability is a subject too detailed to discuss here, but the mere fact that these two aspects co-existed before and during the two greatest economic crises of the past century certainly deserves a bit of recognition.  Statistics compiled by the Institute for Policy Studies suggest a strong association between income inequality and economic instability.  The following graph, while not proving causation, certainly demonstrates an association.  As you can see, the top 1% saw almost equivalent percentages of total earnings in 1928 and 2007.  Also important to notice is that the trough represents a period of American history that helped to define us as the land of upward social mobility.  Income inequality immediately after the Great Crash of 1929 to 1976 saw a substantial decrease, but reversed afterward to the present day.

Some other statistics from the Working Group on Extreme Inequality:

· Percentage of U.S. total income in 1976 that went to the top 1% of American households: 8.9.
· Percentage in 2007: 23.5.
· Only other year since 1913 that the top 1 percent’s share was that high: 1928.
· Combined net worth of the Forbes 400 wealthiest Americans in 2007: $1.5 trillion.
· Combined net worth of the poorest 50% of American households: $1.6 trillion.

Statistics, however, can be misleading unless given some comparisons.  The following is a rather simple chart of different statistics monitored by the International Monetary Fund (IMF) and various other agencies to gauge degrees of economic health and democracy among IMF-funded industrialized nations.

So how does America fit within the paradigm of industrialized economies?  We are among the worst in four critical areas: (1) wealth inequality, (2) prisoner population, (3) student performance in mathematics, and (4) food insecurity. Regarding food insecurity, participants were asked whether they were ever without the necessary resources to purchase food for themselves or their family; 16% answered yes.  It is also worth noting that life expectancy for Americans trends toward the bottom of the list.

There are plenty more statistics out there.  The tricky thing is staying away from government-funded studies, as they can be misleading.  Regardless, such statistics raise the question as to how effective is our current political system.  To this regard, I refer to a short article entitled “Politics as Sport.”

“What a political party does may be more relevant than who wins the Rose Bowl, but probably not much more. None of the nonsense passed in Washington provides net good. It may benefit some factions at the expense of others, but the net result is a negative. Parties may benefit as they seek votes and jostle for advantage. The net effect on the country is always negative unless the action repeals prior legislation.”

The point is that America has been in economic decline despite its dual-party politics.  This begs an additional question as to how different are Republicans from Democrats really.  First, however, we must resist the temptation to attribute irrational policy choices in Washington to shere ignorance.  Many of our elected officials come from wealthy backgrounds and attend top universities around the nation.  Rather, one must examine economic trends as we have done here – particularly since the Great Depression – because it is largely the economic dynamics that play out behind closed doors that determine political choices.  As Mike Shedlock points out, political bargaining is not a product of ideological compromise.  It has simply become an exercise in fiscal mismanagement and political barbarism.

Unfortunately, it’s a very uphill battle because there is no constituency for honesty. Someone who wants to cut military spending and take on the unions gets no money from anyone.

Simply put, we have campaign contribution system that rewards graft, fraud, incompetence, political pandering, greed, and absurd compromises. Economically speaking, we get the worst politicians that money can buy.

This is what is meant by the term “corporatocracy,” which is entirely partisan to big profits protected by legislation.  It is important to keep in mind that each time the federal government passes a new law or regulation, it is often times meant only to narrow the market and decrease competition – also explicitly stated by Adam Smith.  Therefore, one sees a political structure that was never really a dual-party system to begin with.  Massive inequality suggests an alternative reality that few of us see, the reality that our political leaders on both sides of the aisle are beholden only to their constituents with deep pockets. One would be hard-pressed to keep voting blindly within a system of increasingly more checks than balances.

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