Ignore the Downgrade, Krugman Says

Two seemingly — but not actually — contradictory things must be understood to grasp the meaning of the anger and excitement over Standard & Poor’s downgrade of U.S. government debt, says Paul Krugman.

First, S&P has little room to talk. Its poor judgment played a leading role in creating the 2008 financial crisis by awarding AAA ratings to mortgage-backed assets that proved toxic, and it gave the conspicuously moribund Lehman Brothers an A rating right up to its final gasps. Furthermore, S&P’s judgment of a given country’s future ability to borrow freely and cheaply — such as Japan, which enjoys low interest rates today after being downgraded in 2002 — is historically unreliable. And it made rookie mistakes in the analysis used to justify the recent U.S. downgrade, to the tune of $2 trillion, but it went ahead anyway.

Second, America still has problems. Debt has been piling up for a while, and it’s continuing to grow. But that’s not the cause of the problem. The primum movens of America’s crisis is a political movement that refuses to raise taxes on the rich to help pay for rising health care costs, an aging population and more. And Krugman doesn’t mince words about how this problem should be fixed: “The real question facing America, even in purely fiscal terms, isn’t whether we’ll trim a trillion here or a trillion there from deficits. It is whether the extremists now blocking any kind of responsible policy can be defeated and marginalized.” –ARK

Paul Krugman in The New York Times:

America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S.& P., along with its sister rating agencies, played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.

… The U.S. government is having no trouble borrowing to cover its current deficit. It’s true that we’re building up debt, on which we’ll eventually have to pay interest. But if you actually do the math, instead of intoning big numbers in your best Dr. Evil voice, you discover that even very large deficits over the next few years will have remarkably little impact on U.S. fiscal sustainability.

No, what makes America look unreliable isn’t budget math, it’s politics. And please, let’s not have the usual declarations that both sides are at fault. Our problems are almost entirely one-sided — specifically, they’re caused by the rise of an extremist right that is prepared to create repeated crises rather than give an inch on its demands.

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