Friday, August 5, 2011

The US has lost its "AAA" credit rating

Boo hoo. Here's Reuters' report:
The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented reversal of fortune for the world's largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

"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," S&P said in a statement.
Probably this is bad for the economy in the short run, but overall, I think there's something healthy about this. It shows that there are checks and balances working on the government from outside. For instance:
Obama administration officials grew increasingly frustrated with the rating agency through the debt limit debate and have accused S&P of changing the goal posts in its downgrade warnings, sources familiar with talks between the administration and the ratings firm have said.
It's nice to know that government still has to answer to people outside of itself.

Unfortunately, this fiscal crisis (as crises tend to do) has had a perverse effect on our political process. In truth, it ought to be during times of plenty that we seek to restore fiscal sanity. It ought to be when the economy is booming that the government seeks to eliminate waste and make difficult long-term budget decisions, which are even more costly to make during a recession. Tragically, it's only now that the private sector is doing poorly and unemployment is high that people are just scared and angry enough to think about fiscal responsibility. It shouldn't take a crisis to make us think about these issues.

Perhaps Alex Tabarrok's "Unbalanced Budget Amendment" is the right idea: make government get a surplus during times of plenty, precisely so that we can go into debt during a recession. Does this not accord with our basic sense of morality? In times of plenty, save for the future; in times of need, be generous with what you have. Now it seems like we have the opposite: government spends a lot when the nation is prosperous, and then it tightens up when things are most desperate!

It will be the undoing of our democracy if we can't figure out how to regulate government's behavior so that it doesn't behave in such an adolescent fashion.

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