In recent weeks, a growing consensus of economists, analysts and political leaders has called for an end to U.S. fiscal austerity. Even as the influential Reinhart-Rogoff high-debt/low-growth thesis was being shredded, the Congressional Budget Office (CBO) slashed its FY 2013 deficit forecast by $200 billion while Fed Chairman Ben Bernanke told Congress that failure to lower unemployment—and not higher near-term deficits—would lead to "higher levels of public debt than would otherwise occur." Now, Standard & Poor's, the same rating firm which lowered the U.S. credit rating from AAA status almost two years ago, has raised its outlook from "negative" to "stable."
But far more important than S&P's largely symbolic announcement was its warning to Congress about playing politics with the U.S. debt ceiling. Two after S&P declared what should be rightly known as the "Tea Party Downgrade," the company cautioned that unprecedented Republican intransigence over Uncle Sam's borrowing authority could blow up the both the American economy and the U.S. credit rating.
As the Washington Post's Neil Irwin pointed out, America's AAA rating from Moody's and Fitch combined with continued low interest rates on U.S. Treasury bonds expose S&P's "continuing irrelevance." That said, Standard & Poor's update had an unmistakable message for policymakers:
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...In a nutshell, S&P is saying the U.S. situation should continue to improve unless the looming debt ceiling hike is blocked or debt repayments are delayed and domestic spending slashed. As you'll see below, House Republicans are threatening to do both.
We believe that our current 'AA+' rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service.
Back in 2011, the GOP became the first party with both the intent and the votes to prevent a debt ceiling increase and thus trigger a default by the United States. Now, House Republicans are threatening to do it again, holding the full faith and credit of the United State hostage unless President Obama agrees to an ever-growing array of demands including more spending cuts, tax reform and even abortion restrictions. To back up their ransom demand, the GOP is pushing the "Full Faith and Credit Act" prioritizing debt repayments in what Democrats have rejected as the "Pay China First Act."
If this all sounds familiar, it should. After the GOP's first debt ceiling crisis in the summer of 2011, an incredulous S&P warned that the Republicans' unprecedented obstructionism was also incredibly dangerous:
A Standard & Poor's director said for the first time Thursday that one reason the United States lost its triple-A credit rating was that several lawmakers expressed skepticism about the serious consequences of a credit default -- a position put forth by some Republicans. Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that "people in the political arena were even talking about a potential default," Mukherji said. "That a country even has such voices, albeit a minority, is something notable," he added. "This kind of rhetoric is not common amongst AAA sovereigns."That kind of rhetoric may not be common amongst AAA sovereigns, but it's all in day's work for the Republican Party.
For almost two years, CNN anchor Erin Burnett has kept a running count of how many days since the U.S. lost its AAA rating and asks, "What are we doing to get it back?" As it turns out, the federal government has done quite a bit even though, as Irwin explained, S&P's rating is largely meaningless. Unless, of course, Republicans carry through on their threats to block this fall's debt ceiling hike and produce what House Speaker John Boehner warned would be "financial disaster, not only for our country but for the worldwide economy."