Sunday, August 07, 2011

It's not about interest rates...

Ryan Avent actually reads the reasons S & P downgraded US debt. Clearly it is not about spending.
But this interpretation is incomplete and misleading. As S&P’s announcement makes clear, the inadequacy of the deal was only one motivation. As important (to me, even more important) was the the reckless and divisive battle that preceded it: 

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 … [This] weakens the government’s ability to manage public finances … 

This is crucial. Sovereigns aren’t like companies. They can’t go bankrupt, and creditors can’t seize their assets. Their creditworthiness depends as much on their willingness as their ability to pay. As Felix Salmon presciently noted before the announcement was made, it’s not our ability to pay that’s in doubt: 

America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point. 

Absent the toxic politics that infected the debate, we could have hammered out a deal that stabilized the debt without squeezing the economy too much in the near term. After all, Britain, Germany and even Italy seem able to do so, and we have in the past, too.

Investors largely tuned out the debt-ceiling debate until its final days out of a belief based on long experience that for all the antics and rhetoric of the Tea Party, the people who actually run Capitol Hill would never compromise the country’s credit worthiness. After all, it was Mr Boehner who reminded his freshmen colleagues that on the debt ceiling they’d have to act like “adults.” [More]
Along the same lines, I find the most alarming aspect has to to be the idea that a vote could force those who disagree with the far right to change behavior. I mean, that's exactly what the TP won't do when it loses a legislative battle. More to the point, hardliners misunderstand how things happen here in the USA. We don't chafe under restrictions of the law, we, in the vast majority of cases, agree with (albeit grudgingly in some cases) the purpose and voluntarily comply

The IRS could never do enough audits to catch all the tax frauds if we did not have this buy-in by the electorate. Nor could cops stop the speeders. And this is also the fundamental reason we have clearly lost the war on drugs - people do not "feel" criminal enough when using marijuana.

There seems to be no room for gaining support for positions from those who disagree with the right. Instead the joy is in seeing how much a small minority can impose on others.

There is a common retort that this is how the ACA was "forced" on the US. But there is a crucial difference - it was actually approved by Congress and the President. (Interestingly, the vote wasn't a whole lot tighter than many other landmark legislative actions, such as the Bush Tax Cuts). The TP works by preventing approvals, which is not at all the same thing.

In fact, they have raised obstructionism to an art form. Even simple appointment approvals are used as hostages for pet peeves or projects. But gumming up the works is not governing, as we will discover every day. When the ship is headed for peril, not changing course is a bad option. The whole strategy is based on a reductio ad absurdum theory of government by critics who can't be bothered to learn how complex our economy and government has to be to deliver the lives we lead.
In Washington, it’s almost trite to say that the political system is broken. It’s been clear for some time that things really are different, that norms and procedures that once kept fractious congresses functioning have eroded with terrifying speed. If anything, S&P is, as usual, noticing the deterioration too late. But that doesn’t mean the deterioration is not real, or that it should be ignored. Too often, the pressure in Washington is from interest groups and activists and political consultants who are, perhaps without meaning to, pushing towards further dysfunction. Those of us in Washington who would like to see the government work have long wondered when the business community and other entities who need a functioning political system would begin exerting a countervailing force. Perhaps it begins now. If not, then this may be the first of many downgrades to come. [More]
It will be interesting to read the text behind the other downgrades that may be coming. My bet is they are rating our process, not our bonds.

Side Note: There is some confusion about the effect on GSE bonds like the Farm Credit System.

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