S&P’s judgement

I’m no expert on the financial implications, but the S&P downgrade is damning on the US political class:

• More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

Hard to disagree: who wouldn’t be pessimistic about Congress and the Administration?

Hopefully, though, this will strengthen Obama’s hand to reach the “balanced” deal he wanted, i.e one including tax increases. S&P is so gloomy partly because of Republican resistance on taxes:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

So far, Obama has been reluctant to let the Bush tax cuts expire, preferring (for political reasons) that Republicans agree to new increases instead. Perhaps, he’ll now have the balls. And, perhaps, the Republicans will have less power to resist.