In Place of a Villain
By Mike Dorf
As Paul Krugman noted yesterday, the gall of S&P is, well, galling. First S&P plays a substantial role in crashing the global economy by giving AAA ratings to junk that is opaque to investors; then, having largely escaped any serious repercussions, it errs in the opposite direction by downgrading US debt when very low interest rates reflecting dispersed knowledge of a transparent asset suggest virtually no risk.
To my mind, though, S&P is not the primary villain du jour. One can quibble with S&P's bottom line, but its methodology strikes me as sound. In evaluating sovereign debt, it's legitimate to take account of the politics of the sovereign in question. I still think S&P made the wrong call here, mind you. Even had a deal not been struck in Congress, the U.S. was going to prioritize the paying of bondholders. So the risk that the U.S. will actually default on T-bills strikes me as not substantially higher today than a year ago. And as the other ratings agencies have noted, the U.S. debt/GDP ratio is within shouting distance of other countries with AAA ratings on their bonds. So S&P got it wrong, but in a way that is at least defensible. (I'm putting aside the $2 trillion error, and the refusal to explain why correcting the error didn't alter S&P's analysis. Those are inexcusable, although the bottom line judgment still could be seen as reasonable)
The real prize for chutzpah surely must go to those Republican Presidential candidates who, less than a week after opposing raising the debt ceiling, have pointed to the S&P downgrade as evidence of President Obama's failure of leadership. My seven-year old daughter acts this way sometimes. She'll spill a glass of water on herself and then scream at her sister, her mother or me that one of us made her wet. We try not to give her too hard a time when this happens because she didn't want to spill the water in the first place and, after all, she's seven, so we expect her to grow out of this behavior as she matures. Bachmann is 55. Mitt Romney is 64. Meanwhile, Mitch McConnell--who was, relatively speaking, a voice of reason among Republicans during the debt ceiling showdown--has returned to his obstructionist roots and promised future hostage-taking the next time the debt ceiling needs to be raised. McConnell is 69. I'm guessing that none of the Republicans will grow up in the next couple of years.
Now, before my right-leaning readers fire off outraged comments, I'll acknowledge that there is a counter-narrative in which the Republicans in Congress and elsewhere were using the debt ceiling to address what they thought was the real problem: namely, the debt. After all, they say, S&P downgraded U.S. paper because of the underlying fiscal risk, which is occasioned by over-spending. This would be a fair point if it were remotely accurate. The S&P downgrade was indeed based on projected debt levels, but S&P, like the President and other Democrats, and unlike virtually every Republican holding or seeking elective office, understood that the core problem is the gap between taxes and spending, not spending in isolation. So the Republican claim to be concerned with deficits and debt is belied by their commitment to extending the Bush tax cuts for upper-income earners and their opposition to anything that can be labeled a tax increase. Okay, outraged right-leaning readers. Now you can fire.
Meanwhile, me the real question all of this raises is what, concretely, the President should do. By that question, I don't really mean what should President Obama do. Although Obama has now ordered the firing of more predator drone strikes and Navy Seal search-and-destroy missions than all other Nobel Peace Prize winners combined, he seems by nature incapable of treating his domestic political opponents as enemies. That is no doubt to his credit as a human being. But as a President, not so much. Thus we might ask what a Democratic President willing to give as good as he gets would do: WWFDRD, or better yet, WWLBJD?
Drew Westen's brilliant account of where Obama has gone wrong tells us what he might have done differently from day one. (Answer: Nearly everything.) But it tells us very little about what he should do now, even if he were capable of channeling his inner LBJ. Focus on creating jobs? Sure, but with what? The deal to which he just agreed (albeit over a barrel) will mean more cuts in state and local government jobs, acting in effect as a negative stimulus. And anyway, because the President jumped on the deficit-reducing bandwagon well before Republicans demanded that he do so, there is, at this point, no political will for more stimulus.
What the President needs, Westen says, is a villain. But by temperament, Obama is extremely reluctant to identify one. So I think he should turn to the next best thing: The flaws in our political system that have permitted a tiny percentage of the American electorate to capture it for their own private ends. In my next post (on Friday), I'll propose some language for the speech I would write for his re-election campaign.
As Paul Krugman noted yesterday, the gall of S&P is, well, galling. First S&P plays a substantial role in crashing the global economy by giving AAA ratings to junk that is opaque to investors; then, having largely escaped any serious repercussions, it errs in the opposite direction by downgrading US debt when very low interest rates reflecting dispersed knowledge of a transparent asset suggest virtually no risk.
To my mind, though, S&P is not the primary villain du jour. One can quibble with S&P's bottom line, but its methodology strikes me as sound. In evaluating sovereign debt, it's legitimate to take account of the politics of the sovereign in question. I still think S&P made the wrong call here, mind you. Even had a deal not been struck in Congress, the U.S. was going to prioritize the paying of bondholders. So the risk that the U.S. will actually default on T-bills strikes me as not substantially higher today than a year ago. And as the other ratings agencies have noted, the U.S. debt/GDP ratio is within shouting distance of other countries with AAA ratings on their bonds. So S&P got it wrong, but in a way that is at least defensible. (I'm putting aside the $2 trillion error, and the refusal to explain why correcting the error didn't alter S&P's analysis. Those are inexcusable, although the bottom line judgment still could be seen as reasonable)
The real prize for chutzpah surely must go to those Republican Presidential candidates who, less than a week after opposing raising the debt ceiling, have pointed to the S&P downgrade as evidence of President Obama's failure of leadership. My seven-year old daughter acts this way sometimes. She'll spill a glass of water on herself and then scream at her sister, her mother or me that one of us made her wet. We try not to give her too hard a time when this happens because she didn't want to spill the water in the first place and, after all, she's seven, so we expect her to grow out of this behavior as she matures. Bachmann is 55. Mitt Romney is 64. Meanwhile, Mitch McConnell--who was, relatively speaking, a voice of reason among Republicans during the debt ceiling showdown--has returned to his obstructionist roots and promised future hostage-taking the next time the debt ceiling needs to be raised. McConnell is 69. I'm guessing that none of the Republicans will grow up in the next couple of years.
Now, before my right-leaning readers fire off outraged comments, I'll acknowledge that there is a counter-narrative in which the Republicans in Congress and elsewhere were using the debt ceiling to address what they thought was the real problem: namely, the debt. After all, they say, S&P downgraded U.S. paper because of the underlying fiscal risk, which is occasioned by over-spending. This would be a fair point if it were remotely accurate. The S&P downgrade was indeed based on projected debt levels, but S&P, like the President and other Democrats, and unlike virtually every Republican holding or seeking elective office, understood that the core problem is the gap between taxes and spending, not spending in isolation. So the Republican claim to be concerned with deficits and debt is belied by their commitment to extending the Bush tax cuts for upper-income earners and their opposition to anything that can be labeled a tax increase. Okay, outraged right-leaning readers. Now you can fire.
Meanwhile, me the real question all of this raises is what, concretely, the President should do. By that question, I don't really mean what should President Obama do. Although Obama has now ordered the firing of more predator drone strikes and Navy Seal search-and-destroy missions than all other Nobel Peace Prize winners combined, he seems by nature incapable of treating his domestic political opponents as enemies. That is no doubt to his credit as a human being. But as a President, not so much. Thus we might ask what a Democratic President willing to give as good as he gets would do: WWFDRD, or better yet, WWLBJD?
Drew Westen's brilliant account of where Obama has gone wrong tells us what he might have done differently from day one. (Answer: Nearly everything.) But it tells us very little about what he should do now, even if he were capable of channeling his inner LBJ. Focus on creating jobs? Sure, but with what? The deal to which he just agreed (albeit over a barrel) will mean more cuts in state and local government jobs, acting in effect as a negative stimulus. And anyway, because the President jumped on the deficit-reducing bandwagon well before Republicans demanded that he do so, there is, at this point, no political will for more stimulus.
What the President needs, Westen says, is a villain. But by temperament, Obama is extremely reluctant to identify one. So I think he should turn to the next best thing: The flaws in our political system that have permitted a tiny percentage of the American electorate to capture it for their own private ends. In my next post (on Friday), I'll propose some language for the speech I would write for his re-election campaign.