August 5-6, 2011: Economist Blasts Standard & Poor’s Downgrade of US Credit, Blames Congressional Republicans

Hours after financial services firm Standard & Poor’s downgrades the US credit rating from AAA to AA+ (see August 5, 2011), Paul Krugman, a liberal economist and Nobel Prize winner, blasts both the firm and Congressional Republicans for the downgrade. “On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation,” he writes. “And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency. On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?” Krugman states that he and other economists believe S&P’s call for a $4 trillion cut in US spending is “nonsense,” writing: “US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.” He concludes that S&P is “in no position to pass judgment” on the US economic situation. [New York Times, 8/5/2011] The next day, the National Journal’s Edmund Andrews agrees with Krugman, writing: “[I]t’s hard to read the S&P analysis as anything other than a blast at Republicans. In denouncing the threat of default as a ‘bargaining chip,’ the agency was saying that the GOP strategy had shaken its confidence. Though S&P didn’t mention it, the agency must have been unnerved by the number of Republicans who insisted that it would be fine to blow through the debt ceiling and provoke a default.” [National Journal, 8/6/2011] Krugman’s criticisms are echoed a week later by an array of economists and private-sector financial leaders (see August 12, 2011).