Standard & Poor’s lowering of the United States’ Treasury rating from AAA to AA+ seems to represent as much an expression of no confidence in the democratic process as it is a rejection of the recent deal to cut the deficit and raise the debt ceiling.
The Wall Street Journal reports a Treasury Department claim that, prior to its decision to downgrade, S&P erred by essentially using a CBO “alternative” scenario for projecting the rate of deficits, as opposed to the “standard” baseline scenario. The result was a $2 trillion increase in the projected national debt over ten years (but hey, what’s a couple of trillion between friends?). This assumption would effectively counterbalance all but $400 billion of the $2.4 trillion in deficit reduction under the pact, providing only 10% of the $4 trillion increase S&P had warned would be necessary to avoid a downgrade.
According to the WSJ, when Treasury pointed out what it considered a “glaring mistake” to the rating agency, a “jarred” S&P decided to downgrade anyway, but changed the emphasis of their argument from the agreed-upon level of deficit reduction to “dysfunctional Washington political culture” and the “political setting.” In particular, S&P noted their pessimism regarding the challenge of making further progress in light of the difficulty of finding the narrow common ground achieved in the agreement.
Now one could be forgiven if one’s visceral sense of confidence in the republic is not bolstered by watching the President and Congressional leaders put on their version of a fiscal policy cage match. Yet realistically, had the debt ceiling’s increase been delayed, Treasury could have prioritized, servicing the debt and delaying payments for entitlements, employees, contractors and so forth. More to the point, a nation that borrows in its own currency and thus can print money to pay its debts presents little risk of default. This is precisely the difference between the United States and the individual members of the Eurozone.
To be sure, if monetizing the debt results in higher inflation, my view is that this constitutes a kind of real default (see “Europe Learns To Default The American Way, Restoring Transatlantic Balance Of Irresponsibility” and “The “Pained” Consumer Price Index”) but the risk reflected in credit ratings meant to be that of nominal default, of not getting back the currency you’ve loaned with the promised interest. What that currency’s future purchasing power or value in terms of other currencies might be for the future is an issue of great economic importance but beyond the scope of credit ratings, and for good reason. The nominal default of inflation and devaluation leaves the lender paid in the debased currency to service its own prior obligations fixed in that currency. The institutional and systemic risks of a “real” default are not present. Thus, as inflation and devaluation ravaged the value of the dollar during the 1970’s, for example, no downgrade of US debt occurred, and the global financial system continued to rely on the greenback as its reserve currency without skipping a beat.
With the US able to print its debt service, complaints over the speed of America’s democracy reaching consensus and that demand for an immediate $4 trillion deal seem curious at best. Some clue to the underlying logic might lie in the UK’s retention of its AAA rating despite a higher debt to GDP ratio than the US. Standard and Poor’s justifies this by stating its greater faith in the UK’s political process and Downing Street’s ability to execute its deficit-reduction plan. It is true that Great Britain’s parliamentary system gives far less power to the opposition party than that allowed by the US constitution. Implicitly, it strikes me that what S&P longs for is the stronger hand of an executive, with less of the debate and consensus-building America’s system demands in the name of freedom.
For two centuries and more critics have doubted that America’s raucous democracy could govern, let alone face the challenge of determined rivals. At various times those voices were heard in Kabul, Moscow, Beijing (reprising that song today) Berlin, Tokyo, and long ago even Whitehall. We’ve heard them from our own as well; Joseph P. Kennedy’s “democracy is finished” edict comes to mind. Yet I would argue that the genius of our system is to be found in moments like this, when such disparate and diametrically opposed world views as those of Barack Obama and Eric Cantor can be reconciled to produce agreement – partial, imperfect and requiring further work bur agreement none the less, and, in the end, with the consent of the representatives of the vast majority of the electorate rather than only of a majority ruling by narrow margin over its opponents, let alone of an absolute ruler.
That genius of American democracy can be hard to discern sometimes, over strident partisan voices on CNN and Fox (and today perhaps CNBC and Bloomberg). Perhaps to appreciate this brilliance one might paraphrase Swift’s famous observation, noting that when true genius appears in the world, it may be known by this sign, that the dunces are all in confederacy against it.