On August 1, 2011, following a long, bruising, and economically harmful stand-off, a splintered House of Representatives voted to raise the debt ceiling, with 95 Democrats joining the majority and 66 Republicans voting in opposition. Days later, the ratings agency S&P voted to downgrade America's long-term debt for the first time in history.
Two years, two months, and two weeks later, history is repeating itself, with terrific precision. The deficit is much lower, the economy is considerably bigger, we are theoretically wiser from experience, and yet ... here we are.
The country is suffering another long, bruising, and economically harmful showdown over the debt limit. The House of Representatives—still divided not only between two parties but also between two factions within the GOP—seems likely to require another splintered vote to avoid economic catastrophe. Yesterday afternoon, Fitch, another major credit-rating firm, announced it was putting the U.S. on alert for a possible downgrade of the nation's AAA credit rating.
Credit-rating agencies typically don't do this sort of thing. They don't downgrade countries with low interest rates and falling debt-to-GDP ratios. American deficits aren't just falling, they're plummeting at the fastest rate since World War II demobilization, in large part due to sequestration cuts that came out of the last debt-ceiling fight (cuts that are, by most economists' measure, sapping a weak economy of jobs and growth).
But just like S&P's decision two years ago, this alert isn't about economics. It's all about politics.
"S&P didn't just downgrade the U.S. government's debt," I wrote in August 2011. "They downgraded the U.S. government. They determined that the safest asset in the world is being run by a city that is addicted to creating crises. Can you blame them?"
Two years, two months, and two weeks later, I have nothing new to say, really. Copy, print, paste.
It's fashionable to make fun of the credit-rating agencies. After all, they held themselves up as the oracles of finance, but looked like a bunch of amateur street palm readers in 2007 after offering mortgage bonds AAA-grade forecasts only to watch them evaporate with the world economy.
But in this case, S&P was nothing less than prophetic. In 2011, the agency downgraded American governance, and two years later, American governance is behaving as though it deserves to be downgraded. From the S&P report:
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 to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011
And yesterday, from Fitch:
The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy.
Nothing has changed! It's like Groundhog Day, but 720 times longer and completely horrible.
The U.S. economy's ability to rebound and our capacity to borrow easily from international market has never been questioned. But American debt is not risk free. And as long as this government—in particular, one faction of one party—has a veto over our full faith and credit, it never will be.