Holy cow. This is mind-blowing (and confirms my contention that Barack Obama has been working closely with “Big Money” to pressure the G.O.P. to commit what may be electoral suicide):
The credit-rating agency Standard & Poors has released a statement that says, among other things, that merely raising the debt ceiling is not enough to prevent a downgrade of the United States’ credit rating, triggering market instability and causing the interest rate on U.S. debt to skyrocket. What’s more, S&P is attaching numbers and conditions to its statement: to ensure a stable credit rating, any deal between Obama and the Republicans must reduce debt by $4 trillion, should include some balance of cuts and revenues (ie, tax increases), and will involve concessions by both sides (a thinly-veiled repudiation of Eric Cantor’s assertion that merely attending negotiations is the only concession the GOP intends to make).
In short: the G.O.P. must grow up and accept Obama’s offer, including politically suicidal tax increases, or the U.S. economy will tank.
The U.S. Chamber of Commerce and other business leaders already have written to tell John Boehner to stop screwing around and take a deal, the credit-rating agency Moody’s had threatened to downgrade U.S. debt, and a blistering editorial in The Economist last week took Republicans to the woodshed:
“[T]he Republicans are pushing things too far. Talks with the administration ground to a halt last month, despite an offer from the Democrats to cut at least $2 trillion and possibly much more out of the budget over the next ten years. Assuming that the recovery continues, that would be enough to get the deficit back to a prudent level. As The Economist went to press, Mr Obama seemed set to restart the talks.
“The sticking-point is not on the spending side. It is because the vast majority of Republicans, driven on by the wilder-eyed members of their party and the cacophony of conservative media, are clinging to the position that not a single cent of deficit reduction must come from a higher tax take. This is economically illiterate and disgracefully cynical.”
The Economist even advocated for the tax hikes that Obama has demanded (but which the GOP knows may cost them control of the House of Representatives in 2012):
“This newspaper has a strong dislike of big government; we have long argued that the main way to right America’s finances is through spending cuts. But you cannot get there without any tax rises. In Britain, for instance, the coalition government aims to tame its deficit with a 3:1 ratio of cuts to hikes. America’s tax take is at its lowest level for decades: even Ronald Reagan raised taxes when he needed to do so.
“And the closer you look, the more unprincipled the Republicans look. Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence. The White House is offering an 83%-17% split (hardly a huge distance) and a promise that none of the revenue increase will come from higher marginal rates, only from eliminating loopholes. If the Republicans were real tax reformers, they would seize this offer.”
Coming on top of this, S&P’s remarkably detailed statement — almost a prescription for what Congress must do, much as the World Bank instructs third world nations to adopt austerity measures — may be the final blow to beleaguered Republicans, who are tasked tonight and tomorrow with deciding which way to proceed with debt ceiling negotiations — but who now appear to have little choice in the matter.
A fascinating side question is whether the Obama administration had a role in whether or when S&P issued its statement — and when Obama knew that the statement would be issued. It’s already been reported that the Obama Administration primed the financial community months ago to put pressure on the G.O.P. (There’s some benefit to having Wall Street insiders on the Cabinet!)
Earlier today, Obama appeared to retreat from his previous hard-line, must-raise-taxes position, and asked Republicans to choose which of three options they preferred: (1) work toward $4 trillion in total debt reduction over the next decade, including some tax increases and closed loopholes; (2) settle for a lower, $1.5-1.7 trillion debt reduction without tax increases; or (3) Mitch McConnells’ complex plan that essentially simply raises the debt ceiling without any deficit reduction.
While Obama was making that seemingly-generous offer, however, Standard & Poors was preparing to issue its report announcing that options (2) and (3) would be ruinous to financial markets and to the nation’s ability to borrow — i.e., that only Obama’s first option, the $4 trillion, must-increase-taxes plan he has pushed for all along.
My (well-informed) hunch is that Obama engineered the entire day’s events, coming away looking even more reasonable than ever while making sure that the Republicans’ box is getting smaller and smaller.
The key portion of the Standard & Poors report is printed below:
“We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon. If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.
“Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might agree on. But for any agreement to be credible, we believe it would require support from leaders of both political parties.
“Congress and the Administration might also settle for a smaller increase in the debt ceiling, or they might agree on a plan that, while avoiding a near-term default, might not, in our view, materially improve our base case expectation for the future path of the net general government debt-to-GDP ratio. U.S. political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade. Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years. We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a ‘AAA’ sovereign rating, given the expected government debt trajectory noted above.
Further delays in raising the debt ceiling could lead us to conclude that a default is more possible than we previously thought. If so, we could lower the long-term rating on the U.S. government this month and leave both the long-term and short-term ratings on CreditWatch with negative implications pending developments.”
Read more of M.S. Bellows, Jr on Vichy Democrats
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Fascinating post. Thanks.
Wall street spanks GOP! thus us too much.
The republicans must learn a lesson from this. All the dirty tricks in the world are not going to help you when your opponent is already far ahead of you. Cantor screwed the pooch for Boehner and now he either has to back down or face the wrath of the RNC. His 60 or so messianic tea bag followers who vow to never vote for any tax increases will have to go down in shame. The people who elected them are not in approval of their actions.
Well done MS Bellows Jr
Ah, but the Republicans owe no allegiance to the United States. They have pledged it to Grover Norquist, remember.
Welcome to Politicus, terrific piece! Let’s hope the forces that want America to do well are stronger than the forces that don’t.
Great analysis. The business community is starting to question the children they got elected. Yes, it takes a puppet to go Korporate Whore, but when that puppet is so dumb they don’t know when to stop listening to the jingles, baby you got trouble.
Excellent article! Are the Repubs so deaf that they can not hear the majority agree with the President’s proposal? No more “kick the can”–the time to start putting our fiscal house in order is now.
Of course when the US economy tanks under GOP control, the rich and greedy with significant off shore investments and foreign investors including Russian, Chinese and Arabic Oligarchs, can buy it up on the cheap, it’s called treason.
So would the GOP sell out the future of all other Americans as long as GOP politicians and their controlling lobbyists personally profit by it, how small a price would be the correct answer to that.
I actually read the statement by S&P and I not seeing much of what you’ve written about how it is pressuring the GOP. From the release, “Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might agree on. But for any agreement to be credible, we believe it would require support from leaders of both political parties.” Where do see anything about tax or revenue increases in that release? The closest I can come is their assumption for sake of projection that their “baseline scenario assumes near 3% annual real growth and a post-2012 phaseout of the December 2010 extension of the 2001 and 2003 tax cuts.” Whoever wrote this article seems to be greatly interpreting the Standard & Poor’s release to the point where I don’t recognize it.
Follow the link given to the report, it starts at the 12th paragraph down.
Here’s is the 12th paragraph in it’s entirety. Nothing of the nature that this story suggests is there as far as I can see. “We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon. If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.” Could you please post at least the beginning of the sentence that supposedly supports the claims made in this article?
Good catch, Robert — I didn’t fully close that loop in the article.
There are three reasons I say the S&P report effectively instructs the GOP to accept tax increases:
1. S&P knows that Obama for months has offered $4T including $1T in new revenues as his preferred plan. By issuing a statement saying that the only safe exit for negotiators is a $4T plan including a “mix” of spending cuts and revenue enhancements, S&P is pointing at Obama’s “Big Deal” offer as the safe harbor — knowing that revenue enhancements are inseparable from that. What’s more, S&P knows that Obama says anything over $1.7T must include at least some new revenues — ie, that something in that $1-2T range might avoid new taxes. And S&P specifically rules such smaller plans out — again, sending a signal that revenue enhancement needs to be in the deal.
2. The language of the report comes as close as possible to flatly demanding new revenues. Deficit math doesn’t care whether the curve-bend comes in the form of spending cuts or revenue increases; therefore, the report would have no purely economic justification for saying “there must be new revenue.” However, it could have said “we take no position on whether there must be new revenue.” Instead, however, it says, “takes no position on the MIX of spending and revenue measures that Congress and the Administration might agree on.” There’s a big diff between “whether” and “what mix of.”
3. Rereading the report, I observe that the language about both sides making compromises, which I initially interpreted as a rebuke of Eric Cantor’s gamesmanship (and which still may, in part, be such a rebuke), is attached to the “mix” language and is better read as another suggestion that revenues are needed. In full, it says: “Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might agree on. But for any agreement to be credible, we believe it would require support from leaders of both political parties.” And the only major part of Obama’s proposal that the GOP does NOT support is… you guessed it… revenue enhancements.
So does the report say, flat-out, “there must be new taxes?” No. Again, there’s no way S&P could say that without stepping out of its role (and the same core group of Serious Market People already said it, in the Economist piece I quote in the post). But I don’t think there’s any other way to read the report.
Sorry, while I may agree with the Economist piece you referenced, I do feel you misrepresented the S&P release that was the heart of your article.
Wait: tweets and a few responses? This is serious news. Yet, no one’s reporting it. Here’s S&P, yes, the credit rating entity that assessments trillions in debt issues, and yet, no one is paying attention to this? Is it because it’s too complex? For god’s sake, I feel like I’m in a cartoon on a train track and running just ahead of the train behind me. So, instead of throwing Mr. Cantor under the bus, as they most definitely should have done, the “senior” leadership under McConnell and Boehnner ignore Obama altogether? Wow. Oh, I know: let’s do something completely useless and unrealistic–a balanced budget amendment should fix it!
Greg this has been all over the media.
Shiva – I’m seeing lots of reporting about a “possible downgrade,” but not about the prescriptive parts of the report which say that merely lifting the ceiling, or doing a smaller deal, won’t be enough to avoid it. Have you seen any MSM reporting on that? (I sincerely hope so!)
The only thing I have seen is that the ceiling must be raised to avoid a downgrade. That did not come from S&P however.
We do not want to raise the debt ceiling. Just cut spending.
You have to raise the debt ceiling or go into debt and screw the worlds economy up. Not to mention the fact that you will pay far higher interest rates to buy anything. Just cutting spending is about a foolish move as could be made. Thats why so many tea party reps wont be re-elected. You need to add income that has been lost since the reagan days as well.
Weiss and Egan-Jones have already down graded U.S. gov debt. Egan-Jones, just a notch, Weiss, a lot more, nearly to junk status, which is probably too low, but might be closer to the truth than the ratings from the majors.
We are introuble they brought the United states down. We need serious help