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A Minus

August 8, 2011

Well, AA+ is better than any of the grades I’ve ever gotten in my academic career.  And yet that cheeky quip isn’t enough to calm down the riled emotions that are fueling the market freakout that can be described as neither bull nor bear, but only as rabid-wolverine-backed-into-a-corner.  Wall Street and the rest of the world’s markets have read Standard & Poor’s Research Update which outlined the ratings agency’s decision to downgrade the safety of U.S. Debt from its once-pristine AAA rating (the gold-standard [pun intended] of debt ratings) to the still decent, but symbolically significant and less prestigious AA+.

I’m not sure if Washington is familiar with the concept of brinksmanship, but the idea is that one of the two parties has to blink before the impending doom that would ruin both of them.  The deal that Republicans refused to budge from (i.e., never allowing any increase in the revenue outlook), was not an escape strategy that would avert a downgrade.  And yet the Democrats and Obama blinked.

The debt-ceiling debate laid bare the true extent of Washington’s disfunction when it come to deliberation and compromise: as with the budget resolution and narrowly averted government shut-down, Congress has proven its willingness to instigate cataclysmic brinksmanship to achieve dramatic policy changes that are entirely irrelevant and unrelated to the issue at hand.  And in reality, the broken mechanism itself is certainly enough to give a ratings agency pause, even if Congress believed that it would always be able to avert the collision course at the last minute (as they did last week) and not actually default.  S&P is right to not want to trust the drunk driver who decided to start the game of chicken in the first place, even if they avoided the last couple of fatalities.

However, it is unclear whether or not anyone in Washington or the mainstream news media has read the S&P report beyond the first page of bullet points.  In explaining its decision, S&P carefully used nonpartisan terms to decry the divergence of America’s debt burden and its unwillingness to resolve that divergence.  That’s where the analysis stops for the mainstream media, which has now thrown up its hands to call it a “blame game in Washington,” implicitly legitimating each side and making all involved seem just as culpable as anyone else. However, the S&P report specifically and squarely blamed Congressional Republicans for their unwillingness to address the possibility of letting the Bush tax cuts expire as a reason the base scenario looks so bleak and risky.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

So, why is there a question on whom to lay the blame for the downgrade?  S&P directly stated it was Congress’ unwillingness to let the Bush tax cuts expire that changed their assumption as to American solvency.  And yet, American citizens are likely to fall back on their preexisting political beliefs and shake their fists angrily at the other side of the aisle for failing to capitulate.  In the Republican case, they will assume that Democrats should have simply cut more of the entitlement programs they don’t (for whatever reason) favor.

Of course, the voters’ attitudes fuels an inherent divergence in the parties’ philosophy of cooperation and methodology in legislation.  When Republican voters favor a balance of power to cooperation and compromise, it makes sense that they take every issue to the brink.  Especially when Republicans know Democratic voters don’t demand the same stubbornness in the face of compromise.

If the debt-ceiling resolution indicates one thing that will likely recur in future showdowns, it’s Congress’s willingness to punt the tough decisions to others capable of taking politics out of the equation.  And maybe this is a good idea in situations where American voters have no idea what’s good for them (e.g., prisoner’s dilemmas, collective action problems, heuristic failures, etc.).  However, there is a conversely troubling, yet equally reliable tendency of Congress to kick these decisions over to lobbyists who are more technically proficient and capable of filling in the details of their own regulation.  Congress can get away with that at least as long as the public isn’t paying enough attention.

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