22/07 How Congress put our credit rating at risk

Ezra Klein
Posted at 01:08 PM ET, 07/22/2011



(JEREMY BALES/BLOOMBERG NEWS)
Standard Poor’s is getting stricter. Back in October, they said our credit rating was solid for the foreseeable future. “We are keeping the rating at ‘AAA,’ with a stable outlook,” they wrote, because the various age-related pressures acting on our deficits were “unlikely to have an impact on the rating in that timeframe.”
In January, they emphasized their position that the debt ceiling and deficit reduction should be considered separately. “Raising the debt ceiling now is the delayed impact of budgetary choices made in 2010 and in previous years. Although we believe the U.S. government needs to enact a number of fiscally prudent reforms, in our opinion, it’s best practice for governments to enact such reforms on a holistic basis, using the broader and longer-term perspective occasioned by debate on the budget proposal as a whole, and tying any necessary increase in borrowing authority to the budget proposal that creates the need.”
In April, there were signs of some impatience. Now they said we had another two years before we need to take action to protect our credit rating. “Some compromise that achieves agreement on a comprehensive budgetary consolidation program — combined with meaningful steps toward implementation by 2013 — could lead us to maintain the rating where it is. Conversely, the lack of such an agreement by 2013, or a significant further fiscal deterioration for any reason, could lead us to lower the rating.”
And now? On July 18th, the credit-rating agency released a “research update” saying that the United States would be downgraded unless it struck a $4 trillion budget deal in the next 90 days or so. “We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.”
So in under a year, Standard Poor’s has moved us from a three-to-five-year timeframe for a plan to 90 days. The question is, “why?”
This morning, I spoke with David Beers, director of Standard Poor’s sovereign-debt division. He didn’t think there was much to explain. “We live in a dynamic world,” Beers said. “The idea that we or anybody else who does analysis around U.S. public finances would have a fixed and unvarying view over time is simply naive.”
Agreed on the dynamic-world thing, of course. But what was it, precisely, that changed S&P’s view?
In Beers’ telling, it was primarily politics. The growth outlook wasn’t any better than it had been in April, but it wasn’t substantially worse. Nor had the debt burden increased with unexpected speed. It was Washington that had unsettled them. The update was clear about this. The title was “United States of America ‘AAA/A-1+’ Ratings Placed On CreditWatch Negative On Rising Risk Of Policy Stalemate” — italics mine.
“What we’re saying now,” explains Beers, “is we question whether despite all the discussions and intense negotiations, if they can’t reach this agreement, will they be able to reach it after the election?”
Put slightly differently, if Washington hadn’t tied the debt ceiling to a deficit-reduction package, and economic policy was still being made with a minimum of fuss, perhaps S&P would be less bothered now. But the bitter disagreements of the last few months have carried a cost. By showing how much trouble the two parties will have cutting a deal now, they’ve left observers like S&P wondering if we can cut one later, either.
As they put it in their most recent research update, “we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years. We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a ‘AAA’ sovereign rating.”
So S&P is literally saying that America is not acting like a country that deserves a AAA-credit rating. Nice job, Congress.
And having upset S&P, appeasing them might not be so simple. Beers repeatedly emphasized that he wasn’t just looking for a number. He was looking for something “credible.” And credible, in his view, was something that both parties had embraced. After all, he argued, deficit-reduction plans have to be continuously implemented over a decade or more, and if there’s not “buy-in from both parties,” there’s no reason to believe that the plan will survive the inevitable changes in political control.
You might ask whether all this matters. S&P got the financial crisis almost entirely wrong — in fact, their analytical errors, alongside those of other agencies, substantially contributed to it — so why should we listen to them now?
But the question isn’t whether S&P should be listened to. It’s whether the market will listen to them. The agency estimates that downgrading America’s credit rating would lift interest rates by 25-50 basis points. They could be wrong, but I wouldn’t want to bet on it. And if they’re not wrong, well, we actually do have a pretty good idea of what it would mean for interest rates to rise by 25-50 basis points. This paper (pdf) by Third Way looked at what would happen in that scenario and concluded, among other things, that we’d lose 650,000 jobs. We really can’t afford that right now.
By   |  01:08 PM ET, 07/22/2011 

Topic: Economist Debate: How is journalism changing in the digital age?


Displaying all 18 posts.
  • The Economist Online is hosting a debate on the news industry at http://econ.st/p9l5yKand we would like to hear your thoughts on Facebook.

    Like many other industries before it, the news industry is being disrupted by the internet. Among other things, technology is undermining the business models of newspapers: the news organisations that employ the most journalists and do the most in-depth reporting. At the same time, the internet enables new models of journalism by democratising the tools of publishing, allowing greater participation from readers and making possible entirely new kinds of organisation, such as WikiLeaks. Do the benefits of the internet to the news ecosystem outweigh the drawbacks?

    Some argue that a more participatory news system, and greater openness on the part of news organisations, offers journalists new and better ways to do their jobs, serve their communities and hold those in power to account. Others worry that the internet is hollowing out the news system, reducing funding for in-depth reporting and encouraging journalists to lower their standards and focus on what is popular, to attract traffic, rather than what is important. What do you think?

    To read all of the opening comments from our moderator and debate speakers, join the debate on our website at: http://econ.st/p9l5yK. You can also share your thoughts in our discussion forum below and your comment could be highlighted on The Economist's online debate hall.
    about a week ago · Report
  • "offers journalists new and better ways to do their jobs" No, because the issue is that the quality of the journalism has fallen... so there are no better ways, just shortcuts that lead to bad/inadequate reporting.
    about a week ago · Report
  • It doesn´t matter if many editorial´s fall, the one´s that perssist and endure will prevail in this media era.
    about a week ago · Report
  • The quality of the service it doesn´t matter cause ur in the net.
    about a week ago · Report
  • We still have choice. Net or print, there are gd and bad offerings in both arenas & all channels do cheap things for ratings/readers/traffic. Personally I hated the idea of losing print at first but now I like the interactivity of the net (like here, for example! Entering a debate is not 'passive'; I couldn't do this reading a magazine on the train)
    about a week ago · Report
  • The feedback aspect is undisputed Miah Tolha. But we are not journalist; we can say whatever we want about whatever we want. With no checks, no research just from our guts. That is not how journalism should work. Yes we can discuss the effects of news and how it will affect us as a people/community or whatever else you might want to discuss. However the information must be of the utmost quality. So I am of the opinion that the quality of the information is paramount... just so the ensuing debate can be that much better. Perhaps it is just paranoia or just some sort of base fear that I have that so many people inputting how they feel and putting it forward as news will detract from the conversation and the truth.
    about a week ago · Report
  • From the time Newspapers became the servants of particular group including governments, They lost their readers. If a Newspaper is so independent, there will always be a lot of readers who do buy for its independent journalism. When a Newspaper is not, it will go down to the ditch and disapear from publishing its daily/weekly editions and the journalists will have no options but go online looking for a Paragraph-Reader instead of a reader to the whole articles and News.
    about a week ago · Report
  • Our current online debate has reached the rebuttal stage, with 69% agreeing that the internet is making journalism better, not worse. Our debate moderator comments:

    "Jay Rosen points to reasons to be optimistic about new forms of internet-powered journalism; Nicholas Carr observes that it is results that matter, and so far, despite the optimism, the new entrants have failed to deliver. The motion under debate, however, is whether the internet "is making" journalism better or worse, so what matters is the trend. Even if internet-powered journalism has not filled the gap so far, are there signs of progress in the right direction?"

    Read more in our debate hall on The Economist Online at: http://econ.st/p9l5yK or share your views below.
    last Friday · Report
  • What do you think about the prospect of online hacking replacing the less cyber-savvy methods of the fallen News of the world?
    last Friday · Report
  • the difficulties of maintaining a selective voice with prioritising *necessary educational weapon structures ... is without question an objective probable which should delineate the subjective discourse of yesteryear's journalistic operatives. the inclusive formatting with marketing directives is a challenge most news groups have had a luxury to ignore prior to the internet's communal directives. our past was shrouded in deceptions and technology is bringing forth authenticity with these reports. the modern-day broadcaster of news is coupled with the challenges of admiration for iconic idols and disdain for the illiterate in masses. there are one too many voices which need to regulate an audience discourse before taking credence or accomplishment over technological surplus.
    last Friday · Report
  • I think the only real difference is the availability and the immediacy of the written word, rather than a change in quality of all content. If I wish to read an opinion piece in the broad sheets , you have to pay on the net or your reading device,the same as if you walked into a newsagent, what's the difference. The only real difference I see here, is that the publisher saves a fortune in manufacturing/distribution costs.

    The technology that allows me to consume fine writing is a great enabler, not a restriction. My iPad and browser now offer up an array of quality material that was simple not available before. I have several in-depth magazines delivered electronically that are as good today as ever, but what has changed is the immediacy of the transient news, which is now available instantly, and there I would not expect the same quality as before. Newspapers are never going to compete with Twitter, Facebook or Google+ for speed , but they must offer more thoughtful and reflective content later.
    last Friday · Report
  • Post Deleted
    last Friday
  • I think it is unfortunate that print newspapers are not read as widely as they once were. I think you get an experience reading a physical paper cover to cover that can't be duplicated with digital media. You get a continuity of story and there are many things that are covered in print that will be read if one reads the entire paper that can be easily missed in the headline focused digital medium.
    last Saturday · Report
  • I think that the Internet has helped cases such as the Ian Tomlinson death at the G20 protest, as it was the public's access to YouTube that got the evidence out there to a large audience. In a sense, the Internet is providing people with a platform to voice opinion which I think is a good thing. I'd say that it's improving the quality of the reporting as it's preventing journalists from reporting sensationalised, inaccurate information.
    on Wednesday · Report
  • Our debate on the internet's impact on journalism is coming to an end with closing statements in from both speakers. It is your final chance to vote and influence the outcome of the debate, so vote now and tell us the thinking behind your views. Our moderator opens his comments with:

    "Perhaps it should not come as a surprise, given that this is an online debate, that the voting tally has been consistently in favour of the motion, and by a large margin (roughly 70% in favour, 30% against). Jay Rosen may be right to suggest that the internet's beneficial impact on journalism seems obvious, at least to some people; but Nicholas Carr may also be right to suggest that only news junkies, of the kind who attend online debates, see things that way. As you consider casting your own vote, if you have not done so already, you may want to ask yourself: are you a news junkie? And if so, do you think the internet has improved journalism for everyone—or just for you and other news junkies?"

    Where do you stand? Vote now and post your views on either The Economist online:http://econ.st/p9l5yK or here on Facebook.
    23 hours ago · Report
  • The underlying issue is that the quality of the so-called journalists has become so degraded that most of the content is merely opinion, not news. There is no argument that the volume is increased but the quality is diminished to the point of unreadability. If you take a sample, it is rehashing the same few ill researched bullet points that do not tell the story.
    Couple all this with the polarized opinions of the "news" organs themselves and you are left with garbage.
    The basics of spelling and grammar are not being taught in schools because the "new" media is supposedly catering to the young and hip who cannot spell or construct a decent sentence either.
    I used to read a newspaper because there was an effort to dig into the facts and present all the information so that I could formulate my own opinion about a news item. Now it is all headlines and little or no facts and the slant is already applied for me. If I am a typical internet sheep then this is fine. Unfortunately I would rather make up my own mind.
    The other problem is that there is rarely any follow up on a story. SInce internet news has to be relevant, (read "immediate"), yesterdays story is never heard of again.
    By the way, blogs are not news. 
    20 hours ago · Report
  • What would Marshall McLuhan say? Oh, he already said it. Today would have been McLuhan's 100th birthday. (I couldn't be sure if he was a subscriber of The Economist. We could ask one of his sons.) But he was indeed big on participatory anything, even in his teaching style, so he'd be quite happy today were he to observe these goings-on and pseudo-debate. Journalism has already changed in the way that writing has already changed. To journos: Just get to the truth, is all, howsoever you get to it. Journalists tend to assume the worst of the public -- their most instant failing -- forgetting that vacuity creates a vacuum.
    19 hours ago · Report
  • Which came first, the vacuum or the vacuity? We've seen all the arguments for why the degradation of language is an OK thing, and the upshot is that fragmented phrases and tweets leave the message in a massaged medium. McLuhan would probably have been happy watching today's mess. That doesn't mean Marshall's message was foretelling a good thing, merely that he was a good forecaster.
    17 hours ago · Report

20/07 Checking in on the coming boom


Housing markets

Jul 20th 2011, 18:19 by R.A. | WASHINGTON
KARL SMITH continues to argue that a housing boom lurks around the corner:
Lots of people said we are not going to see booming construction for a long time and seemed to feel the fundamentals backed that up.
Yet, over the beginning of 2011 lots of data series have started to turn in the same direction. We are seeing growing consensus that this is simply not sustainable and something is going to have to give.
Moreover, just like a price bubble, this housing shortage is a growing phenomenon. The longer it goes unaddressed the bigger the correct will be. And, quite frankly there is no reason to think actual housing supply will begin to tick up in the next 12 months. The lead time on home building is just too long.
So we are probably looking at 2 years minimum before we get a significant reduction in pressure. All the while shadow households are still forming. Couples are still getting married or waiting to get married. Babies are still being born, etc.
When housing corrects, I have to guess that it will correct hard.
The context for this argument is an American economy in which the decline in home construction has apparently overshot dramatically relative to the prior boom. The decline in home construction from 2006 has been unprecedented, and it continues; at the current pace, 2011 would see a record low addition to the housing stock. Meanwhile, the population of working age adults has continued to grow. Pressure in some housing markets (rental markets especially) is beginning to build, translating into rising rents and (in some markets) prices. 
That process will eventually spur new construction. Indeed, we saw a nice increase in housing starts in June. But starts, while up, remain at historically low levels. More importantly, construction occurs on a long lag. If rents start soaring tomorrow, supply can't respond immediately. Builders have to scope out new land, go through design and permitting procedures, and then build. Pressure for a boom may therefore be building.
But Scott Sumner provides a note of caution: household formation has also fallen dramatically in recent years. He attributes this drop, in part, to a crackdown on immigration, but he also credits falling demand for immigration and simple economising among natives, both associated with the weak economy. Reduced construction makes sense, in other words, because demand is lower, because people feel poorer.
I don't see that this rules out the boom Mr Smith has in mind. It simply means that America's housing market is stuck, for the moment, in a bad equilibrium that is vulnerable to an increase in expected growth. First-half GDP growth of (roughly) 2% is consistent with a low level of household formation, in line with a low level of construction. But if growth should accelerate in the second half, as expected, to 3% or more? Well, the pace of household formation will increase. Construction will increase, too, but on a lag. As household growth outpaces construction prices will rise, spurring more construction, employment, and growth. That will lead to still more household formation in excess of lagging new construction, and the boom is on. We would expect the number of households to snap back to a level near the pre-recession trend (near, because demographics are becoming ever less favourable for household formation). To meet that demand, we'd need to see a substantial recovery in construction activity.
There are other factors that are likely to temper a construction boom, not the least of which is tight lending standards. Nevertheless, the odds of a strong turnaround in housing over the next year seem to be fairly good to me and getting better.