Oh No They Didn’t: Econ Bloggers React to the S&P Downgrade

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Standard & Poor’s was heavily criticized for its decision on Friday to downgrade for the first time in its history the credit rating of the debt of the United States. Politicians, and in particular Republicans, came under fire for having let the debt ceiling standoff go on for so long. And it was unlikely that the downgrade would do anything. Those were in general the reactions bloggers had to the news of the S&P downgrade.

New York Times blogger and Nobel prize-winning economist Paul Krugman said that given S&P’s poor record with mortgage bonds it had little credibility when it came to rating the credit quality of U.S. debt. What’s more, Krugman said S&P’s math behind the downgrade made little sense. S&P said that the deal to raise the borrowing ceiling should include $4 trillion in debt reduction. When it only included $2.4 trillion, S&P used that as justification for why the ratings agency was going through with the downgrade. But Krugman says this is all phony math. He says there is no justification for the $4 trillion figure and another trillion or so in cuts makes little difference when we are already over $14 trillion in debt. Krugman says,”In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.” And Krugman wasn’t alone in teeing off on S&P.

My TIME colleague Massimo Calabresi over at Swampland said that S&P embarassed itself with the downgrade, something that the two other major credit ratings agencies said they wouldn’t do. In handing down the ratings change, S&P made a calculation error that added $2 trillion to the estimated total of our national debt by 2021. That miscalculation Calabresi said was symbolic of the agency’s years of shoddy work. He said S&P would likely be ignored, and for good reason.

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Greg Mankiw, a Harvard economics professor and former adviser to President George W. Bush, put up a chart on his blog showing that federal non-military spending under President Obama had spiked to 20%, up from around 15% before his presidency. The debt deal struck in Washington primarily attacks this part of the budget with no tax increases. Mankiw presumably put up this post to defend the deal, and say that S&P is wrong to essentially say the deal is a bad one with a downgrade. But perhaps the best summary of the opinion of those who thought S&P was unjustified in its downgrade came in a one-sentence post titled Stupid by a blogger who goes by the name Atrios:

Apparently we’re supposed to care about what some idiots at some corrupt organization think about anything.

Many other bloggers, though, thought it was unfair to attack S&P. Reuter’s blogger Felix Salmon said it was clear that the U.S. no longer deserved S&P’s highest AAA rating. He said griping about S&P’s math was silly. Salmon says the real issue is not the U.S.’s ability to pay, it’s the U.S.’s willingness to pay. The ratings agency has to make a call on both when it tells investors the likelihood they will get paid back. And, Salmon says, with a serious contingent of politicians in Washington more than willing to drive the U.S. into default – with many in the Tea Party openly saying they wanted a default and even voting against the 11th and three-quarters hour deal –  S&P was well with its analytic right to alert investors to the fact that America’s willingness to pay is in serious question.

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Megan McArdle, a typically conservative blogger, over at the Atlantic, said that Republican lawmakers were the ones to blame for the downgrade, not S&P. She said the Republican’s unwillingness to compromise on taxes was the reason we didn’t get any grand deal in Washington that could have made a real difference in cutting our debt and avoiding a downgrade.

What bloggers seem to agree on was that the downgrade in unlikely to have a major affect on either the stock market, bond market or economy, at least not any time soon. Bloggers for the Wall Street Journal‘s Real Time Economics who were attending an economics conference said forecasters there pretty much shrugged off the significance and potential impact of S&P’s downgrade. Tyler Cowen, an economic professor at George Mason University who is the co-author of the popular blog Marginal Revolution said that no one should take an “alarmist” view of what might happen next. Everyone is well aware of the U.S.’s slow recovery and fiscal challenges. There is nothing new in this downgrade. Yet, Cowen says the downgrade is just another sign of the U.S.’s long downward slide.

I’m not sure how markets will respond, and I don’t think that an alarmist reaction about the market would be appropriate.  A letter grade is a letter grade and the facts on the ground did not change today.  It may or may not lead to a major sell-off.  Still, years from now today may well be seen as a turning point of significance.

In the end most of the bloggers agreed that the lesson of the S&P’s downgrade was that politicians needed to be able to make more compromises the next time a budget debate came up. Few, though, were sure that Washington has learn that lesson.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.

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