Sunday, August 7, 2011

S&P Doesn't Tells Us Anything We Didn't Know

All the hubbub this weekend has been about S&P's "surprising" decision to downgrade the United States' credit rating from triple-A to AA+ with a negative outlook. This resulted in both Republicans and Democrats coming out and declaring "I told you so!" Republicans claim they told us so because of excessive spending taken upon by this administration for the last 2+ years. And Democrats claim they told us so because of insistent Tea Party representatives and activists who brought us "to the brink of default." As if Washington would fail to turn an objectively truthful economic statement as powerful as a credit downgrade into political showboating!

Let's look at the facts of S&P's downgrade justification, as shown in their report (available on their website at and the crazed reaction by establishment economists and politicians...

Upon reading S&P's report, the reader finds among the main reasons for their downgrade: a lack of real entitlement reform (which cripples the federal budget) in the recent debt ceiling bill (the Budget Control Act of 2011), no prospect of increase in revenue to cover the national debt, and the political brinksmanship illustrated in Washington during the debt ceiling debate.

Now, let's look at these factors individually:

1. A lack of real entitlement reform: Entitlements, especially Medicare and Social Security, have been, and will be if left unchecked, crippling to the federal budget. According to a paper released by the Cato Institute entitled "Deficits, Debt, and Debasement," these entitlements will equal about 18.2% of GDP by 2052. They will absorb all the tax revenue taken in by the government at current tax projections. And yet, progressives, like Nancy Pelosi, refuse to address the issue. S&P even noted that one of the budgets that would have helped averted a downgrade was Representative Paul Ryan's, which addressed entitlements, like Medicare. In truth, Ryan's plan didn't go far enough, but it would have truly been a step in the right direction. Even that, however, truthfully may not have been enough to keep our credit rating unblemished. So, it's truly puzzling when establishment types throw blame upon the Tea Party when it was the establishment liberals who prevented true entitlement reform from taking place, which S&P said would have prevented a downgrade.

2. No prospects of increased revenue: To be fair, the S&P report does seem to be indicating that it's desirable form of revenue raising is tax increases, but it does not say so explicitly. The only clear point is that there is truly a lack of prospective raises in tax revenue. However, as any supply-side economists would point out, tax increases are far from the only way to increase revenue. There are free market actions that the federal government could undertake that would result in higher revenues. For example, through repealing anti-market bills, like the Dodd-Frank Wall Street Reform bill, institutions would have greater ability to higher workers, because of available funds that would have otherwise gone down as compliance costs. Let's say the net result of that is a reduction in the unemployment rate of 1%. That results in about 1 million fewer people taking advantage of government welfare, like unemployment compensation and food stamps, while also increasing the amount being paid in taxes because of newly acquired income. Therefore, rising employment results in less government expenditures and higher revenues. Without even raising a single tax, which would have otherwise have caused the price to hire another worker to increase and cause employers to pass along the increase to their employees and customers, making everyone poorer. But if you think pinhead economists like Larry Summers and Austan Goolsee will realize this anytime soon, you're fatally optimistic. And yet it is their inability to acknowledge this basic economic fact that helped result in the downgrade.

3. Political Brinksmanship: What needs to be said here? Liberals will be first to blame the Tea Party. However, it was liberals who created outrageous ads aimed at inciting fear in the general public in response to Ryan's budget. It was Obama who kept on showing up on TV needlessly to give his nonsensical two cents on the then ongoing debt ceiling deal. And it was the unwillingness from liberals to reform entitlements that resulted in a joke of a debt deal getting passed.

So, taking these factors into account, coupled with continuous economic data that has all the indications of stagflation courtesy of failed political and Federal Reserve policies, why is anyone surprised that S&P downgraded the USA's credit rating?

It seems the standard, uninformed response to S&P's downgrade is something along the lines of, "These are the same people that missed the sub-prime mortgage crisis, why should we believe them now?" Well, if you're going to assume that logic, then why should we believe Fitch or Moody's, other renown credit rating agencies, when they kept us at triple-A? After all, they missed the sub-prime crisis, as well. Why is their word any better than S&P's?

The truth is S&P is the only credit rating agency, among the most well known, that has actually taken a step in vindicating their mistake in missing the sub-prime crisis. This much was also admitted by PIMCO financial manager, Bill Gross. American credit is not as reliable as credit from countries who actually exhibit fiscal responsibility, like Switzerland. Therefore, a downgrade is correct and inherently justifiable.

Anyone who was taken by surprise by the downgrade or disagrees with it is not doing a good job in keeping abreast of the country's economic condition. The term being overused now is "double-dip recession." This is incorrect. A recession requires a period of growth or prosperity to precede it. We have had no true growth or prosperity. Therefore it is a non sequitor to say double dip. We have never recovered from the original recession. Those painfully unaware of this, I beg you to become more properly informed.

The long run is here--it's time to get sober.