Statement on the S&P Downgrade

For Immediate Release

Statement on the S&P Downgrade

Standard & Poor's Downgrade Reveals Its Own Problems, Not the Government's

WASHINGTON - Dean Baker, co-director of the Center for Economic and Policy Research released the following statement on Standard & Poor's downgrade:

"The decision by Standard & Poor’s to downgrade U.S. government debt reflects its own failings as a credit rating agency. It says nothing about the creditworthiness of the U.S. government.

"The Treasury Department revealed that S&P’s decision was initially based on a $2 trillion error in accounting. However, even after this enormous error was corrected, S&P went ahead with the downgrade. This suggests that S&P had made the decision to downgrade independent of the evidence. 

"It would be difficult to find any basis for questioning whether the United States will be able to repay its debt. With investors willing to hold trillions of dollars in long-term U.S. debt at interest rates well below 3.0 percent, the financial markets certainly do not seem to share S&P’s concern. It is also noteworthy that interest rates fell in the wake of S&P’s decision, providing further evidence that the markets do not take S&P’s assessment seriously.

"It is also striking that the downgrade comes in the wake of an agreement that would actually lower the country’s projected debt burden. If S&P was actually looking at the prospects for the U.S. debt it seems that the more obvious point at which to have made the downgrade would have been last December when Congress and the president agreed to extend the Bush tax cuts. It is difficult to understand how a decision to increase indebtedness does not lead to a downgrade, while a decision eight months later to reduce indebtedness does. 

"The country’s long-term budget projections do show excessive deficits. However these are driven in large part by projections of explosive growth in private sector health care costs. The Congressional Budget Office’s projections imply that in 2030, the cost of providing care in the private sector for an 85-year old, will be more than $40,000 a year (in 2011 dollars). Health care costs of this size would impose a crushing burden on the economy regardless of how they are divided between the public and private sector. Remarkably, S&P never mentioned health care costs as a concern in its lengthy downgrade statement. 

"Of course, since U.S. debt is payable in dollars, and the U.S. government controls the printing of dollars, it is not clear what a downgrade could even mean. As long as the U.S. government knows how to print dollars, it will always be able to make the interest and principle payments on its debt.

"Clearly the S&P downgrade was not based on the economics of the country’s debt. S&P has a horrible track record of incompetence in the housing bubble years – they gave Lehman’s Bros. AAA rating just before its collapse – and the accounting scandals of the stock bubble years. This downgrade should be seen in this light. It is not a serious assessment of the nation’s fiscal condition."

###

The Center for Economic and Policy Research (CEPR) was established in 1999 to promote democratic debate on the most important economic and social issues that affect people's lives. In order for citizens to effectively exercise their voices in a democracy, they should be informed about the problems and choices that they face. CEPR is committed to presenting issues in an accurate and understandable manner, so that the public is better prepared to choose among the various policy options.

Share This Article

More in: