Saturday, August 6, 2011

S&P: Cut Medicare, Social Security

Nearly lost in all the media hubbub over S&P’s unprecedented decision to downgrade the US credit rating is the blatant fact that it is meddling in US politics. Robert Reich makes the obvious point that S&P’s responsibility is simply to assess whether the US is likely to pay its debts, and that it has no right to insert itself into the question of how much debt the US should decide to maintain. But even Reich does not go far enough.

What S&P is doing is to use its rating leverage to take sides in the ongoing deficit negotiations in Washington. In its justification of the downrating, S&P says (a) it wants more deficit cuts, and (b) that the problem is partisan brinksmanship in those negotiations makes it unlikely that the federal government will accept the necessary package of revenue increases, especially tax hikes, and entitlement cuts needed to attain (a).

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.

In other words, the downgrade is about the further negotiations regarding deficit reduction that will resume when Congress reconvenes after the August break, specifically the debate over the balance between tax hikes and entitlement cuts.

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.

S&P says that it takes no position on how the two parties work out that balance, as long as they do cut the deficit further.

Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.

But that is disingenuous. Everybody in Washington (save perhaps the delusional would-be bipartisans in the White House) knows that the current GOP will never allow any tax increases. Hence what S&P is really saying is it demands to see cuts to Medicare and Social Security. It is threatening to lower the nation’s credit rating even further unless the deficit is cut even further, so the message is clear: Cut entitlements.

All of us saw that Obama and the Democrats allowed themselves to be taken hostage in recent months in order to save the Treasury’s creditworthiness. Now S&P is trying its hand at the same thing.

Update, Aug. 8: Right on cue, as the NYT reports, members of Congress start worrying about how they can get back into the good graces of S&P:

The downgrade of the United States government’s credit rating by Standard & Poor’s is almost sure to increase pressure on a new Congressional “supercommittee” to mute ideological disagreements and recommend a package of deficit-reduction measures far exceeding its original goal of at least $1.5 trillion, lawmakers said Sunday.

Even before the panel is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury.

The report certainly got the attention of Capitol Hill.


Credit rating agencies have thus emerged as a powerful constituency whose concerns are taken seriously by Congress.


S.&P. did not advocate a specific mix of increased revenue and spending cuts. But it did say that overhauling entitlement programs was “key to long-term fiscal sustainability” and that the debt deal “envisions only minor policy changes on Medicare.”

The practical and foreseeable effect of S&P's action and its announcement was mainly to ramp up pressure on Democrats to concede to entitlement cuts that their constituents oppose strongly. It's hard to believe that that was not its intent. In fact S&P has a history of throwing its weight around in political matters on behalf of Wall Street interests.

crossposted at

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