Is Standard and Poor’s Too Bearish about U.S. Public Finances?

April 18, 2011

Officials in the Obama Administration predictably called the decision by S&P, the credit rating agency, to change the outlook on its AAA rating for U.S. debt to “negative” far too bearish and unjustified.  I disagree for several reasons.

First, President Obama has been underestimating the scope for bipartisan governance since he was candidating for the office.  Political trends over the last two years in Washington have instead become more polarized,  not less.  Obama’s people are hardly a credible source when they say that at least $4 trillion of deficit cuts will be worked out soon.

Second, American history actually does not inspire confidence that the people always put the national interest above other social, ethnic, income, and geographical identifications.  The current political split pits the north against the south and the authority of the Federal government over private enterprise as well as its powers vis-a-vis those of the state governments.  These fault lines have existed since the nation’s infancy and produced a war 150 years ago that culled the population by an astounding 2%.  

Third, the angriest people and ones most resistant to compromise are paradoxically those whose lives have done comparatively well.  If political compromise were achievable based on the altruism of those best able to make accommodations for the good of all, it surely would have happened already.

Fourth, the fundamental threat to humanity, excessively rapid population growth, is not getting sufficient attention.  It took 1800 years for world population to climb by roughly 700 million to 1.0 billion and another 123 years for such to reach 2.0 billion.  World population then tripled to 6.0 billion in just 72 years and will reach 7.0 billion in just over another year.  That’s incremental growth of 1 billion in 13 years.  Exponential growth in the planet’s number of people, and their lengthening and more affluent lives, are putting enormous strain on resources needed to meet those demands and on the ecological balance that makes life uniquely possible on earth.  It’s a tough environment for many countries.

Fifth, the United States is one place where standards of living are struggling to stay ahead of the pack.  Three trends illustrate this difficulty.  The first is U.S. population, which is expanding marginally faster than 0.9% per annum.  Real GDP and jobs would need to rise that fast just to stand still on a per capita basis.  But in fact because of the increasingly disparate growth in income and wealth between the most well-to-do Americans and others, GDP must rise much more quickly than 0.9% to endow most people with a feeling that there standard of living is standing still.  The table below compares per annum growth in U.S. real GDP and employment growth since the end of 1999 with their respective rates of expansion in the third and final quarters of the last century. 

% Per Annum Since end-’99 1975-1999 1950-1974
Employment 0.01% 2.1% 2.3%
GDP Growth 1.7% 3.3% 4.0%

If elected officials from an increasingly ideological and polarized electorate cannot negotiate a long-term reduction of federal deficits — and S&P attaches a 33% probability to an impasse extending past 2013 — the fear is that standards of living will deteriorate.  I submit that an inflection point has already occurred and the perception of deterioration likely will become more pronounced.  The secular decline of the dollar’s external value since the 1960’s suggests that investors already understand this truth on a sub-conscious level.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.


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