Is Standard & Poor’s Downgrade of America Legitimate?

No.

That’s the short answer. To spell it out a little more, Standard and Poor downgraded the rating of US securities because it thinks the US has too much debt and no clear commitment to paying it off.

So what? Many Americans think the same thing. Others, like me, thing that the important thing right now is to stimulate the economy and create more jobs; doing that would require – temporarily – a larger deficit, until the resulting prosperity raised revenues and let us bring it back down.

Whatever you think, though, that is a political decision, to be made through democratic processes. It is not something that should be (or can be, fortunately) dictated by a ratings agency.

Much is being said about S&P’s basic incompetence. Their original downgrade statement was based on a calculation of the national debt that was off by two trillion dollars, and they were one of the companies that gave top ratings to junk-quality mortgage-based derivatives a few years ago. But that’s not even the point. They have absolutely no legitimacy in downgrading America as a way to impose their policy preferences.

The only legitimate concern over America’s debt is whether we will pay it. After the fiasco earlier this week, that’s a real concern. We should get rid of the debt ceiling, or at a minimum Congress should agree to go back to treating periodic increases in the debt ceiling as routine housekeeping. But bringing down the deficit has nothing to do with our ability to pay our debts.

Much as I would like to see the Bush tax cuts reversed (and S&P mentioned this as an issue) we don’t need to do that in order to pay our debt service. We can always pay the debt, if we decide to (and we should) because we are a sovereign nation and control our own money. (If you are thinking of Greece, that’s the big difference – they don’t. Their money is controlled by the European Central Bank). The very worst that can happen is that we will pay the debt by issuing more money. That may not be the ideal way to do it, but it does make US government debt perfectly secure, unless Congress refuses to raise the debt ceiling again – and they are not going to do that.

One last point: S&P first set the US rating at AAA in 1941, as the US was accumulating the hugest deficits (as a percentage of GDP) that it has ever had, in order to pay for the war. If US debt was a secure investment then – and it was – it is a secure investment now.