How to Think About Standard and Poor's Downgrade Posted: 8/6/11 12:27 PM ET
Standard and Poor's downgrade of U.S. government debt captured headlines across the country and around the world. It is a newsworthy event, but primarily as another colossal failure by a major credit rating agency.
First, it is worth mentioning the important background here. S&P, along with the other credit rating agencies, rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade. They were paid tens of millions of dollar by the investment banks for these ratings. We know that concerns were raised by their own people about the quality of many of these issues. This was at the least astoundingly incompetent. It was quite possibly criminal.
This raises the question of whether S&P fears an investigation and possible prosecution. In such circumstances the desire to curry favor with powerful politicians could certainly influence their credit rating decisions. There are also rules affecting the credit rating agencies in the Dodd-Frank financial reform bill. The desire to have these rules written in a favorable way could affect the credit rating agencies' decisions. It would be nice if we could just assume that the credit rating agencies make their rulings on an objective assessment of the evidence, but we can't.
Let's look at the evidence. S&P made a big point of citing the fact that the debt deal did almost nothing to slow the growth of Medicare and other entitlements, obviously alluding to Social Security. S&P surely knows that Medicare's cost growth is driven by projections of explosive growth in private sector health care costs. The projections it relies upon from the Congressional Budget Office show that the cost of providing health care to an average 65 year-old in the private sector will be almost $20,000 (in 2011 dollars) a year by 2030. Of course, this will make Medicare unaffordable if it proves true, but this projected explosion in health care costs will be devastating for the U.S. economy even if we eliminated Medicare and other public sector health care programs altogether.
If S&P were being honest, it would have written about the need to fix the U.S. health care system. Instead it talked about the need to cut Medicare. Of course, if U.S. health care costs were comparable to those in any other country in the world, then we would be looking at massive surpluses in the long-term, not deficits.
The reference to Social Security also cannot be supported. The program is financed by its own designated tax. Under the law, if benefits exceed the money raised by the tax, then they are not paid. If S&P assumes that Social Security will add to the deficit in future years, then they are assuming that Congress will change the law in a way that no one is now proposing.....................>>>>......................>>>>....................http://www.huffingtonpost.com/dean-baker/how-to-think-about-standa_b_920148.html
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