Was S&P right? Congress responds to credit downgrade with sniping.
S&P downgraded its credit rating for US debt Friday, citing a lack of congressional leadership to find compromise on deficit reduction. Somewhat ominously, congressional leaders responded to the news with partisan shots.
Congress’s response to the downgrading of the US credit rating Friday was to fall back on partisan talking points – a response that tends to confirm Standard & Poor's criticism that the US may lack the political capacity to solve its debt crisis.
Republicans called on Democrats to take up entitlement reform and urged the president to fire Treasury Secretary Timothy Geithner, who last spring said that a downgrade was not likely. Democrats called on Republicans to ignore "extremists" within their own party and agree to tax hikes.
While Congress and the White House focused on getting a deal to raise the debt limit by Aug. 2, S&P and other rating agencies called for strong moves to get the nation back on a sustainable fiscal course, including at least $4 trillion in deficit reduction.
But the deal that Congress passed and the president signed into law on Aug. 2 promised only $917 billion in deficit reduction over 10 years, with up to another $1.5 trillion to be negotiated by a new joint committee this fall – well short of the $4 trillion goal. S&P responded Friday by dropping the US debt rating one notch, from its top AAA grade to AA+. The two other major credit-rating agencies, Moody's and Fitch, have kept the US at AAA.
“The fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount we believe is necessary to stabilize the general government debt burden by the middle of the decade,” S&P said in a statement on Friday.
S&P was also alarmed that Congress and the White House took negotiations right down to the point of default. Congress passed the debt deal just hours before US was to lose its borrowing capacity.
Now, Friday’s downgrade means that Congress will likely have to come up with a deeper package of deficit-cutting measures if lawmakers want to ensure that Moody's and Fitch don't follow S&P's lead in the years ahead – a move that would almost certainly increase in interest rates, making the nation’s debt crisis even more severe, says former US comptroller general David Walker.
“The most dramatic reforms are still likely to wait until after the 2012 election, but they need to raise the bar and achieve at least $3 trillion in deficit reduction over the next 10 years,” not just $1.5 trillion, he adds.
But the way back to an S&P AAA rating – and way out of the debt crisis – will also require Congress and the White House to find new ways of negotiating and compromise, say longtime Congress watchers.
“What we saw with S&P’s action on Friday was as much a downgrading of our political leaders as it is of our fiscal situation,” says former Rep. Tom Davis (R) of Virginia, who headed the National Republican Congressional Committee.
“Parties are now ideologically polarized,” he says. “For most of the new members, their key race is the primary election, where compromise is seen as caving on your principles.”
“Voters bear some responsibility for this. They’re the ones applying these ideological tests in primaries, and they’re the ones who have to live with the results,” he adds.
One early test of Congress’s willingness to embrace compromise will be who congressional leaders appoint to fill the new joint committee. “I hope leaders in both political parties will select members who are skilled negotiators and committed to compromise,” says former Rep. Jim Slattery (D) of Kansas, a cofounder of No Labels, a nonpartisan public-policy advocacy group.
So far, there’s little sign that a cultural shift is imminent. House Speaker John Boehner (R) of Ohio called S&P’s downgrade a “wake-up call” that Democrats can “no longer no longer afford to tinker around the edges” of the long-term debt problem. “As S&P noted, reforming and preserving our entitlement programs is the ‘key to long-term fiscal sustainability,’ " he said in a statement.
On the Senate side, majority leader Harry Reid (D) of Nevada reprised calls for Republicans to agree to tax hikes on corporate jet owners and the wealthy. S&P’s action calls for “a balanced approach” to deficit reduction, he said.
Congressional leaders have another week to appoint members to the new, 12-member joint committee, which will present its deficit-reduction plan by Thanksgiving.
“Leaders should appoint members who will approach the committee’s work with an open mind, instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S&P are demanding,” Reid added, in a statement.