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Paul Heroux

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Who Should We Trust? Dems, GOP... Standard and Poor's?

Posted: 08/06/11 12:00 AM ET

How in the world can anyone take the credit rating agencies seriously? In the lead up to the crash of the financial markets spurring the worldwide economic crisis of 2008, credit rating agencies were giving weak, unstable, and ultimately disastrous finical products AAA ratings. On this issue, Standard and Poor's credit rating agency sent the US Treasury a report with a $2 trillion error.

If you followed this debt story you heard that default could cause a downgrade which could result in increased interest rates on all of us who owe debt, ultimately making it harder to pay off debt. It could also result in inflation, higher interest rates to take out loans, something that small businesses and big businesses alike depend on making it harder to grow and expand the economy. It will also make it more difficult for the US government to sell Treasury bonds and result in fewer revenues for the government. This is the disaster that was talked about.

To rate the US, they assess the economy, liquidity of the country, monetary policy, and fiscal policy and then on an odd number of people on a committee vote on what the rating should be based on what analysts have said about the US condition. Downgrading us could prove to be a credit rating agency disaster as it has with other countries that have been downgraded.

Debt can be useful. There is good debt and bad debt. Public debt to finance current programs is bad. But debt to build a public bridge or build a new public building isn't bad -- generations will use it so generations pay for it. I am not a follower of Donald Trump but he was right when he said that debt has helped him and others like him become rich. Debt is often necessary to grow. To know when too much debt is too much is to look at it relative to the GDP and expected growth. So why did we get downgraded?

Standard and Poor's rating agency cited dysfunctional policy making in Washington as a factor in the downgrade, stating "The effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges." They also said that they want to see a credible plan to reduce US debt. As it turns out, after all the drama, reducing the debt $2.5 trillion over ten years doesn't reduce our debt, it just reduces the amount of debt growth. At present the US owes just over $14 trillion. In ten years we were expected to owe about $28.8 trillion; now we will only owe $26.3 trillion. Remember -- don't judge debt unless you know what it is for.

Some partisans claim that big government is the reason that we have so much debt and so we have to have smaller government to control the debt. That is a distinctly ideological perspective and probably isn't the best way to analyze this situation. First, I don't think that anyone would disagree that we shouldn't make government more efficient where we can. However, the idea that the US government must be small is utter nonsense. The US is the third largest country (after Russia and Canada) and most populous country (after China and India) in the world. To assume that we can run a country of this size and complexity on a 'small government' is just naive. If we ask what a small government would look like, we can push this idea to its logical extreme and we can look to countries that have the smallest government control over their land. They are in complete anarchy. Government has its place.

The single largest contributor to the deficit is the Bush tax cuts. But it is not the only factor. The unfunded wars in Iraq and Afghanistan, the unfunded prescription coverage, and the ARRA (AKA, the Stimulus) are all factors. Also, it is uncertain at this writing if the Patient Protection and Affordability Act (AKA, Obamacare) was considered by S&P to contribute to the growing debt; the non-partisan Congressional Budget Office estimated the legislation would reduce the deficit by $143 billion over the first decade and by $1.2 trillion in the second decade, whereas the Republican majority on the House Budget Committee estimate the law would increase the deficit by more than $700 billion in its first 10 years. Without having seen the analysis, I'll go with the non-partisan group over partisans.

In my opinion, the nail in the coffin that led to our downgrade was probably the dysfunctional political atmosphere in DC. There are many new members of Congress who have vowed that they would rather be 'dead right than just right' - they will drag the economy and the country down just to make a point or fulfill a mandate. But they got that mandate wrong: jobs are why they were sent to DC, not the debt. I hope for the sake of our country and for every one of us regular people just trying to get by, they are tossed out in 2012.

Paul Heroux is a Massachusetts native. He is a master's graduate of the London School of Economics and the Harvard School of Government and can be reached at PaulHeroux.MPA@gmail.com.