The U.S. stock market declines for many reasons, but it is not controlled by a particular political party. The stock market responds to potential profits. Nonetheless, the recent declines of the stock market cannot be interpreted as an endorsement of the Republicans. The Republicans essentially threatened their way to what they wanted in the recent manufactured debt ceiling crisis deal, and the stock market decline in part reflects fears that the U.S economy is hostage to the Republican Party’s reluctance to do what is necessary to create jobs.
The Standard and Poors downgrade in the U.S. credit rating is somewhat more complicated. There is a case for the downgrade in that the Republicans will manipulate the debt ceiling legislation in ways that threaten our ability to pay our debts. When lunatics help rule the asylum, it is hard to believe we are in safe hands. Nonetheless, Standard and Poors has lost substantial credibility. This is the same Standard and Poors that gave extravagent ratings to the mortgage securities that brought our economy to its knees in 2008. Without the negligence of the credit rating agencies (or their unwillingness to bite the hands of the banks that pay them), investors could have been warned to stay far away from these securities.
But, as Paul Krugman observed yesterday, the economic analysis of Standard and Poors in defence of the downgrade is just plain shoddy. As he suggests, the debt burden is neither a short- term nor a medium-term problem. Indeed, Robert Pollin, a professor of economics at the University of Massachusetts observes (discussed here) that in 2010, interest payments on the debt were 5.7 percent of total government spending. The average for that ratio between 1950 and 2010 was 9.8 percent. Thus, our current debt burden is less than the historical average.
It is not to President Obama’s credit that he lost the rhetorical war to the Republicans. He allowed them to make our debt burden to appear as a crisis when it is not a crisis. Of course, not paying our bills would have been bad for the economy, but the politically manufactured debt ceiling crisis should not be confused with our long-term debt problem. Meanwhile, the problem all along has been jobs. And the failure to focus on that has been bad for the administration and the country.
Fortunately, as the New York Times reported on its front page yesterday, the American public is fully aware that the jobs problem is far more pressing than our long-term debt problem, and the public though disgusted with Washington across the board is most angry with the Republicans in general and the Tea Party in particular. The frothings of Fox have not disguised the responsibility for the recent fiasco in Washington. The American public has its eye on the ball.
Nonetheless, the Republican Party will do what it can to stop the reelection of President Obama and that includes assuring that high unemployment continues. But the polls show that the American public is aware of that too. The country’s hope in the near term is that Republican legislators come to fear that an angry public will drive them from office for their economy-wrecking behavior and that they come to believe that the state of the economy has implications for their own political lives.
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