Last Friday, the Standard & Poor’s rating agency made history by ratcheting the U.S. credit rating down a notch from AAA to AA+. (The two other major rating agencies, Moody’s and Fitch, kept the U.S. at AAA.) The Obama administration argued S&P overestimated the U.S. debt by over $2 trillion. And though S&P recognized the error, it argued the debt ceiling deal was inadequate to maintain an impeccable credit rating.
Politicians from both the Democratic and Republican parties have blamed one another for the decision by S&P. GOP presidential candidate Michele Bachmann attributed the downgrade to President Obama, while Obama advisor David Axelrod blamed the Tea Party for toying with a default to force spending cuts.
S&P may have overstepped its boundaries by pointing to a dysfunctional political environment to partially justify the downgrade, but the politics of the last few weeks were very much a source of dismay and concern judging by the results of a NYT-CBS poll taken last week. The survey not only gave low marks to Obama for his performance during the debt ceiling debate, it also gave an even lower grade to Congress, with only 14 per cent approving of its performance compared to 82 per cent who disapproved. In addition, the Tea Party, considered the prime instigator behind the rigid “no new taxes” approach to dealing with the deficit and the debt, has a favourable rating of just 20 per cent. The super committee of Congress assigned to deal with the next and more crucial round of cuts will have its work cut out, and there are few voices expressing much optimism about the outcome.
While the US had a better than expected jobs report in July, worries about a potential double dip recession have begun to surface. The situation in Europe, where Spain and Italy have joined Greece on the watch list of a possible bailout, complicates matters even further. Markets around the world are expected to be nervous and volatile in the weeks ahead.
In a somewhat ironic twist, the S&P rating may serve as a wake-up call to the political class on both sides of the Atlantic. Deficits and debts are more than numbers and they are not products of one administration, or a specific set of policies. They are the product of years of policies that were unsustainable in the long run.
In recent weeks, the conservative Wall Street Journal has frequently cited Canada as the example the U.S. must follow if it wants to stimulate economic growth while reducing its deficits. The WSJ specifically identified tax cuts and reduced spending as effective ways of eliminating the deficit and boosting the economy. Assuming the WSJ has a legitimate argument as it relates to Canada, it omits to mention how important Canada’s balanced approach and the absence of ideological fervour have been in achieving economic stability and recovery.
Increased tax revenues—remember how the GST came about?—along with a reduction in spending by the federal government in the 1990s are what allowed Ottawa to balance the books. Effective innovation policies, investments in infrastructure and research and development, a drive to open up new markets, and tighter regulation of the financial sector by successive governments were also part of the Canadian formula for success. Gradually, there were cuts to personal income taxes and the GST, but it is worthwhile to highlight that Canadian political parties on both the left and the right—at both the federal and provincial levels—chose to deal with the problems and not play to their respective ideological bases for political advantage.
Perhaps this is the message S&P was sending: compromise, a balanced approach, and less ideology are what’s needed. But at the end of the day, any lasting solutions will have to come from the political leadership, and not just the credit agency.