S & P Downgrades the United States

Aug 6, 2011

Yesterday, the Standard & Poor's rating agency downgraded the United States' long-term bond rating from AAA to AA+.

This downgrade is consistent with earlier warnings from the rating agency that a package closer to $4 trillion would be necessary, combined with the fact that the most recently enacted deficit reduction plan would be insufficient to even stabilize our debt. More fundamentally, S&P has expressed concern that Democrats and Republicans will not be able to agree to sufficient further deficit reduction -- particularly in the areas of revenue and major entitlement reforms. According to S&P

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics... More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.

This morning, CRFB reacted with a press release. As it reads:

"This is a heck of a wake up call,” said Maya MacGuineas, President of the Committee for a Responsible Federal Budget. “It’s like when your alarm clock goes off too loud, and you can’t find the button to turn it off. We have been ignoring the slew of warnings from the major rating agencies and others from the IMF to the Fed, for way too long while failing to seriously address our debt challenges. Now we have this fiscal scarlet letter until we make the needed reforms to get our debt under control.”

“Between now and December policymakers will either be involved in a serious national discussion over how to bring our debt under control or else another round of theater and brinksmanship,” said MacGuineas. “We still have a real opportunity to enact serious entitlement changes, tax reform, and an economic growth strategy. But if we fail, I fear other ratingagencies will follow suit with S&P, with economically dangerous consequences.