Yes, people like John Kerry were quick to blame the Tea Party and claim that the S&P downgrade was solely due to a lack of tax increases, but that’s not what S&P said. Still, that's probably all you heard. So, here are five things the media made sure you missed:
1) The left says the S&P downgrade had to do with the Tea Party not wanting to raise taxes. They hope you don’t read this:
Standard & Poor's takes no position on the mix of spending and revenue
measures that Congress and the Administration might conclude is appropriate
for putting the U.S.'s finances on a sustainable footing.
2) It’s not all about taxes. S&P prominently criticizes the political impossibilities of containing growth in public spending and reforming entitlements. Is that the tea party’s fault too?
We lowered our long-term rating on the U.S. because we believe that the
prolonged controversy over raising the statutory debt ceiling and the related
fiscal policy debate indicate that further near-term progress containing the
growth in public spending, especially on entitlements, or on reaching an
agreement on raising revenues is less likely than we previously assumed and
will remain a contentious and fitful process.
3) They note that the debt ceiling deal didn’t go far enough. You might recognize that as the Tea Party position.
We also believe that the fiscal consolidation plan that Congress and the
Administration agreed to this week falls short of the amount that we believe is
necessary to stabilize the general government debt burden by the middle of the
4) Along with the deepness of the recession, the sluggishly terrible Obama “recovery” was another reason for their negative position. Is the Tea Party responsible for the Obama’s failed economic policies too?
First, the revisions show that the recent recession was
deeper than previously assumed, so the GDP this year is lower than previously
thought in both nominal and real terms. Consequently, the debt burden is
slightly higher. Second, the revised data highlight the sub-par path of the
current economic recovery when compared with rebounds following
previous post-war recessions. We believe the sluggish pace of the current
economic recovery could be consistent with the experiences of countries that
have had financial crises in which the slow process of debt deleveraging in the private
sector leads to a persistent drag on demand. As a result, our downside case
scenario assumes relatively modest real trend GDP growth of 2.5% and inflation
of near 1.5% annually going forward.
5) They might downgrade us again if they see “less reduction in spending” than was agreed to. Is the Tea Party also responsible for not cutting spending enough?
The outlook on the long-term rating is negative. We could lower the
long-term rating to 'AA' within the next two years if we see that less
reduction in spending than agreed to, higher interest rates, or new
fiscal pressures during the period result in a higher general government
debt trajectory than we currently assume in our base case.