S&P Upgrade of U.S.: More Proof the Ratings Agency Shouldn’t Play Politics

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On Monday ratings giant Standard & Poor’s raised the U.S.’s credit outlook from “negative” to “stable.” That may sound a bit like the equivalent of Arrested Development’s Bluth Company going from “Triple Sell” to “Don’t Buy,” but in these troubled economic times, Americans should take what they can get. Thanks to a housing rebound, stock boom, renewed consumer confidence, growing tax receipts and smaller projected budget deficits, things are actually looking up.

S&P’s adjustment to Uncle Sam’s sovereign debt outlook, its first since the agency stripped the U.S. of its gold-plated AAA rating in August 2011, acknowledges a less dire budget situation now than two years ago. There’s only one problem: S&P’s infamous downgrade of U.S. debt wasn’t really about our fiscal predicament. It was about our politics – and there’s little sign that that has changed.

For those who don’t remember, S&P downgraded the U.S. at the conclusion of a high-profile Congressional fight over raising the national borrowing limit, which caps the federal debt even if we need to issue more of it to pay the bills we’ve already incurred. While Congress averted disaster at the last moment, the agency’s analysts concluded that Washington‘s political climate was too toxic to adequately address the country’s fiscal needs. Here’s a taste of their Aug. 5, 2011, statement:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

A funny thing happened after S&P’s dire warning: Nothing. The bond market didn’t bat an eye — 10-year Treasury yields have remained incredibly low. The world still seems to have complete confidence that the U.S. government will be around to pay its bills long into the future. If anything, people are more eager than ever to buy our debt. In Washington, almost everybody got re-elected and each party retained control of its respective pockets of government. The deadlock and brinkmanship continued. The tax code and entitlement programs went unreformed.

(MORES&P Upgrades U.S. Outlook, but Investors Yawn)

Meanwhile, S&P is sticking to its story that despite a better economic outlook, America deserves its less-than-perfect rating. “We believe that our current ‘AA-plus’ 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,” S&P said Monday.

But that statement suggests that S&P’s political analysis was flawed all along. Public officials do not need to “react swiftly” to a fiscal situation that’s only problematic “over the long term.” It may not be pretty, but Congress acts at the last minute when it has to. (S&P on Monday even favorably cited Congress’ avoidance of the so-called “fiscal cliff” late last year–despite the fact that, like the debt ceiling deal, action was delayed till the 13th hour.

In purely technical terms, the improved outlook means that S&P no longer sees an increased risk of another downgrade. But perhaps it’s even a tacit recognition of what I argued at the time of the first one: hyperpartisanship is not a novel force in American politics; nor does it necessarily preclude political action; a debt crisis is not imminent; and S&P should stay away from the political prediction game.

(MOREUh-Oh: We Already Started Spending Like It’s 2005)