Krugman responds to the S & P downgrade

So the stock market fell precipitously again today, certainly not helped by the unprecedented downgrade by Standard and Poor's credit rating agency. Markets have destabilized worldwide.

Paul Krugman's response in his New York Times column today is worthy of attention.

He begins by saying that, to understand what it means, you have to hold in your mind "two seemingly (but not actually) contradictory ideas." (1) that the U.S. is no longer the stable, reliable country it once was; and (2) S & P's credibility is even lower.

He points out that S & P's, along with other rating agencies, played a role in causing the 2008 financial crisis. They gave AAA ratings to mortgage-backed assets "that have since turned into toxic waste." And it gave Lehman Brothers an A rating right up to the month that it collapsed and triggered the global panic. Not only that, but they made a $2 trillion error in their calculations about our deficit, which our Treasury officials quickly called to their attention. They even conceded the error -- but issued the downgrade anyway.

So, why should anyone listen to Standard & Poor's economists?

Which brings us to Krugman's other point: It's political dysfunction, not the deficit, that is the problem.

No, what makes America look unreliable isn’t budget math, it’s politics. And please, let’s not have the usual declarations that both sides are at fault. Our problems are almost entirely one-sided — specifically, they’re caused by the rise of an extremist right that is prepared to create repeated crises rather than give an inch on its demands.

The truth is that as far as the straight economics goes, America’s long-run fiscal problems shouldn’t be all that hard to fix. It’s true that an aging population and rising health care costs will, under current policies, push spending up faster than tax receipts. But the United States has far higher health costs than any other advanced country, and very low taxes by international standards. If we could move even part way toward international norms on both these fronts, our budget problems would be solved.

So why can’t we do that? Because we have a powerful political movement in this country that screamed “death panels” in the face of modest efforts to use Medicare funds more effectively, and preferred to risk financial catastrophe rather than agree to even a penny in additional revenues.

The real question facing America, even in purely fiscal terms, isn’t whether we’ll trim a trillion here or a trillion there from deficits. It is whether the extremists now blocking any kind of responsible policy can be defeated and marginalized.

And, for all its credibility problems, Standard & Poor's explanation for its downgrading said as much. They said it was political dysfunction in Washington, that Republicans seem unwilling to allow the Bush-era tax cuts to expire.

The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

I may be naive, but at this point it seems to me that we should not be bad-mouthing S & P's reliability record but thanking them for making this point in a way that demands attention. There's an old Southern expression about being stubborn as a mule. "To get a mule to go the way you want, first you have to hit him over the head with a 2 x 4 to get his attention."

There does seem to be a sense of urgency that NOW we really have to get beyond partisanship and come up with a plan that will restore our credit-worthiness. Even if S & P's is way off base on the math, they're spot-on in assessing our political dysfunction and making that the issue.

Ralph