SOME COMMON SENSE ON THE DOWNGRADE – AT 8:54 A.M. ET:  The big story of the day is about to begin...the American stock market's reaction to the downgrading of American credit by Standard & Poors. 

Over the weekend we saw, via the mouths of John Kerry and others, the Democrats' awkward attempt to blame the downgrade on the Tea Party.  True, the Tea Party doesn't rank very high in opinion polls, but the attempt fizzled rather quickly.  Barack Obama is president, not the Tea Party, and Americans are actually aware of that.

At the same time, the administration was attacking Standard & Poors for issuing the downgrade itself.  But The Wall Street Journal, while skeptical of ratings agencies like S&P, argues for some common sense in dealing with this humiliation:

is there anything that S&P said on Friday that everyone else doesn't already know? S&P essentially declared that on present trend the U.S. debt burden is unsustainable, and that the American political system seems unable to reverse that trend.

This is not news.

In that context, the Obama Administration's attempt to discredit S&P only makes the U.S. look worse—like the Europeans who also want to blame the raters for noticing the obvious. Treasury officials and chief White House economic adviser Gene Sperling denounced S&P for relying on a Congressional Budget Office scenario that overestimated the U.S. discretionary spending baseline by $300 billion through 2015 and $2 trillion through 2021.

But even adjusting for that $2 trillion would only reduce U.S. publicly held debt to 85% or so of GDP—still dangerously high. And that assumes that recently agreed upon spending caps are sustained over a decade, something which rarely happens.

We think the larger problem with S&P, Moody's and Fitch is that they make no distinction over how a nation balances its books—whether through tax increases or spending reductions. Like the International Monetary Fund, the raters care only about balance.

This takes too little account of the need for faster economic growth, which is the only real path out of a debt crisis. Britain's government has earned rater approval for its fiscal consolidation, but its increases in VAT and income tax rates are hurting its tepid recovery. Letting the credit raters dictate tax increases is the road to an austerity trap.

The real reason for White House fury at S&P is that it realizes how symbolically damaging this downgrade is to President Obama's economic record. Democrats can rail all they want about the tea party, but Republicans have controlled the House for a mere seven months. The entire GOP emphasis in those seven months—backed by the tea party—has been on reversing the historic spending damage of Mr. Obama's first two years.

COMMENT:  You'll probably see more economic analysis in the next week than you've seen in a lifetime.  Everyone is out there with a theory, but the Journal is fundamentally correct.  We will get out of this only by growth in the economy, growth that has so far eluded the Obamans.  Achieving that growth may mean putting aside some perfectly good social goals for a time in favor of economic growth which, in turn, will make social goals more attainable.

I am not an economist, and don't pretend to be one, but it does seem to me that the manufacturing sector – expanding and enriching it – may well hold the key to growth, and that working on ways to make this country more competitive again in manufacturing can produce quick dividends.  But ideology too often rules this administration, and its middle-level administrators have little regard for a sector that too many of them loathe.

August 8, 2011