Analysis of the Political Opportunism Using the S&P Downgrade of US Federal Debt

Here is a bit from an article published in Politco by Matt Stoller, who worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.) and is now a fellow at the Roosevelt Institute:

Let’s note, at the start, that this downgrade was absurd. The credit rating of the United States is not in jeopardy. The U.S. government prints dollars — it can no more run out of dollars than a bowling alley can run out of strikes.

What’s really happening is an attempt by both parties to justify slashing Social Security and Medicare. Republicans have long wanted to roll back the New Deal. What is relatively new is that a Democratic president is now dead set on cutting these programs as well.

President Barack Obama, in his speech Monday about the downgrade, used the market turmoil as an excuse to do just that. After a debt ceiling deal in which the Democrats argued that defense spending cuts — not entitlement cuts — could close the long-term deficit, Obama said Monday that there’s “not much further” he can trim defense. Despite the fact that defense spending has gone up on his watch. Instead, Obama said, we need cuts in social spending, or, as he phrased it, “modest adjustments to health care programs like Medicare.”

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In the early 1990s, according to Canadian investigative journalist Linda McQuaig, Canadian corporate executives encouraged ratings agencies to threaten a downgrade of their nation’s credit as an inducement for cutting social spending and lowering high-end tax rates. It worked.

And today we are seeing that Republicans use ratings agencies to support their conservative agenda: that the government can’t spend so much on entitlements such as Medicare and Social Security. Benefits of public employee unions must also be slashed, public assets privatized and the disruptive power of unions countered.

The government, this argument insists, needs to be run like a business — and rated like one.

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S&P’s downgrade may ultimately provide cover for the Democrats leadership, as well. They now have the excuse that can justify to supporters why they have no choice but to break promises made to senior citizens, unions and the public. For example, House Democratic Whip Steny Hoyer has been giving speeches for years advocating entitlement cuts.

So S&P is offering these politicians an excuse for a remarkably unpopular action. By treating this downgrade as meaningful, Democrats and Republicans could join in a bipartisan effort to slash entitlements — government social programs that are popular, work well and have relatively strong funding streams.

The reasoning is Orwellian. Medicare is cheaper and better than private health insurance — which is why we cannot afford it. Social Security may run out of money in 27 years— why it’s important to cut the payroll tax that funds it. The Bush tax cuts for the wealthy should be extended indefinitely — but the prospect of Social Security and Medicare for everyone else creates a fiscal emergency.

The rush is on to carve up what’s left of social spending — and everyone’s represented but the public.

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There’s a big problem in destroying these entitlement programs, however. It’s not just the increase in poverty and suffering. These programs, which people have paid for with payroll taxes for their entire lives, give Americans a sense of why it’s useful to support the government as legitimate. To see what happens when a social contract falls apart, look at the massive rioting in London.

Middle-class incomes are down radically in the U.S. since 2007, as much as 15 percent according to new Internal Revenue Service data. Home equity is still falling. If cherished entitlement programs are also savaged by the politicians who destroyed our life savings, citizens might begin to question whether this whole constitutional democracy thing is worth it.

Strange and ominous political eddies are already emerging. Congressional disapproval is higher than 80 percent. This could turn ugly — as it has before in U.S. history. While we’ve airbrushed the legacy of political violence out of U.S. history, it’s there. Labor conducted gun battles with Pinkerton private military forces in the late 19th century. Strikes often turned deadly in the 1930s. If there are serious defense cuts, the prospect of hundreds of thousands of war-weary former soldiers thrown into a terrible economy is not, shall we say, a recipe for social stability.

With proposals on the table to cut defense and social spending in a deflationary economy, maybe U.S. political leaders are just throwing one final, blow-out empire-ending party.

I don’t mean to push the panic button. After all, America has a stable political order that can handle a great deal of stress. This system, though, is rooted in a middle class that believes its interests are aligned with those running the country.

As the wealth, opportunity, social status and economic security of the middle class evaporate, so, too, could this belief.

The riots in the UK should put some fear into US political leaders, but it is clear that it won't. Obama is oblivious. The Iowa straw poll proves that the Republicans live in an alternate reality. Sadly all things come to an end. Maybe the glory days of the US are over and it is now on a steep decline to banana republic status.