Downgrade Drama: What S&P Got Wrong
America’s economy is not in crisis, but its political system is, or so thinks the S&P. The real problem, however, is not the political system per se, but its infection with populism.
Even though the S&P has downgraded the US’s credit rating, it did so from an exaggerated understanding of American politics based on its shrillness, and not its constitutional fundamentals. This is why on the first trading day after the downgrade, American bonds are still the place to go. The fact is there aren’t enough AAA bonds out there for investors to substitute American bonds for, however “dysfunctional” American politics looks. AAA bonds in Europe aren’t safer given the uncertainty in the euro zone, and stocks are certainly not going to be safer in these turbulent days. As potent as the Tea Party has become, there is still zero threat of default by the US, as Warren Buffet has noted, because the US Treasury pays its bills in US dollars, which the Fed can print at will.
S&P’s downgrade, then, was driven in part by a misunderstanding of the way a separated system of checks and balances works. For all the charges of the Tea Party’s “hostage taking,” it is still their constitutional right to do so. But they also lack the constitutional power to have their way, which is exactly what happened. In the end, cooler minds in the House and Senate prevailed, and Congress actually passed a very, very bi-partisan bill that raised the debt ceiling.
But only in part. Unfortunately, because the S&P was duped, the populist infection has spread. The Tea Party anthem of doom and gloom had already been raging for two years, but the S&P added to its chorus by believing it. Saying so has finally begun to make it so, and the toxic language of the Tea Party Movement has helped bring consumer and business confidence to its knees.
Thanks also to the Movement, the unsophisticated debate about the public debt as a single monolithic figure has meant that we have not been able to sift out the real long-term problem of entitlement spending, and the possibility that government spending may well be required in the short term to stimulate demand, invest in education for the future, and address the infrastructural deficits in this country since businesses are reluctant to invest. Instead, the government’s hands are clipped, even though it is precisely in this moment of distress that government needs to step up to offer some hope. Instead of a balanced menu of solutions, too much of what we hear from Washington is indiscriminate talk of austerity as if it were the silver bullet to all our economic problems.
The problem, then, is unregulated populism. Popular movements have always swept politicians into Washington; divided party control of government has always existed. But the framers never intended for the movements which swept their leaders into government to continue to hold a leash on them so that the whole point of representative government has now been turned on its head. Demagogues from both parties have become slaves to some of the irrational voices among their constituents, but the worst are those whose hatred of government is so intense that they actually wish for the full faith and credit of the US to be downgraded so that they can satisfy some atavistic yearning for a pre-modern economy based on corn and cotton. (Is this really what the spirit of ’76 was about?)
To begin to get ourselves out of the immediate pickle, the super-committee of the Senate designated to discuss further spending cuts ought to be sequestered as much as is possible with little media contact, so that unelected feudal lords like Grover Norquist cannot stick their noses into the process and turn the cooling saucer of the Senate into another playpen for demagogues. Leaders should be allowed to be leaders — John Boehner came so close to being one — and should be permitted to think about the big picture and the long term without recourse to petty interests and ideologues. Thank goodness most senators aren’t up for election next year.
This is already a time of panic, of disillusion, and of market irrationality; so there is no need for more. The framers created a representative democracy so that the noise would be filtered out, not invited to the deliberative halls of the greatest democracy the world has seen. Let leaders be leaders; if not, a system that has morphed out of control may well be seeing the beginning of its end.
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