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Richard D. Wolff

The S&P Downgrade of US Debt: What it Means

Much verbiage is piling up on this issue. Yet, it matters little that the two other giant rating agencies did not downgrade US debt as S&P did. It is likewise unimportant that all those agencies deserve the bad reputations won when their over-rating of securities burst in the collapse of 2007 and took an already unbalanced economy into deep recession. Nor does the downgrade impose major cash costs anytime soon.

The S&P downgrade is important because it clarifies and underscores two key dimensions of today’s economic reality that most commentators have ignored or downplayed. The first dimension concerns exactly why the US national debt is rising fast. There are three major reasons for this: (1) major tax cuts especially on corporations and the rich since the 1970s and especially since 2000 have reduced revenues flowing into Washington, (2) costly global wars especially since 2000 have increased government spending dramatically, and (3) costly bailouts of dysfunctional banks, insurance companies, large corporations and the economic system generally since 2007 have likewise sharply expanded government spending. With less tax revenue coming in from corporations and the rich and more spending on defense/wars and bailouts, the government had to borrow the difference. Duh!

The second dimension concerns the “deal” just agreed between President Obama and the Republicans in Congress. That deal promises further major increases in the national debt in the years ahead. That is because it does not alter any of the three major debt causes listed above. The political theatrics of the two parties reflect the money/power of the corporations and the rich, keeping their tax cuts, subsidies, and government orders untouched. Instead, the two parties pretend concern about the debt, debate only how much to cut government spending on the people, and focus on the 2012 election.


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S&P downgraded the US national debt because these economic and political dimensions of the US today guarantee a worsening of the nation's debt. Thus, a basically political problem is looming for those lenders who purchased and now own the debt obligations of the US (i.e. Treasury securities). The political problem is this: how long will the mass of Americans accept not only an economic crisis bringing unemployment, home foreclosures, reduced real wages and job benefits, but now also cutbacks in government supports? When will the political backlash explode and how badly may it impact the creditors of the US?

When might that backlash demand that the people’s taxes stop going to pay off creditors (corporations, the rich, and foreigners) and be used instead for public services that the people need? Exactly that political danger for creditors prompted the rating downgrades for the debts of Greece, Portugal, etc. The same danger has now reached our shores and confronts our nation'a creditors.

S&P decided – for reasons good and bad, noble and venal – to say what any reasonable observer knows (given that such backlashes hurting creditors have often happened in recent history). Creditors need to worry about the combination of economic crisis, growing inequalities of wealth, income and power, and political dysfunction that now defines the US. The risks of backlash against creditors rise with the national debt. Not to worry is irrational and dangerous for them. And for us?

Richard Wolff

Richard D. Wolff

Richard D. Wolff is professor of economics emeritus at the University of Massachusetts, Amherst, where he taught economics from 1973 to 2008. He is currently a visiting professor in the graduate program in international affairs of the New School University, New York City. Richard also teaches classes regularly at the Brecht Forum in Manhattan. His newest book: "The Sickness is the System" (2020). His other books include: "Capitalism's Crisis Deepens: Essays on the Global Economic Meltdown(2016); "Democracy at Work: A Cure for Capitalism" (2012); "Occupy the Economy: Challenging Capitalism(2012); "Contending Economic Theories: Neoclassical, Keynesian, and Marxian" (2012); and "Capitalism Hits the Fan: The Global Economic Meltdown and What to Do About It" (2009). A full archive of Richard's work, including videos and podcasts, can be found on his site. Follow him on Twitter: @profwolff

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