Why S&P’s Debt Outlook Shouldn’t Keep Congress From Dropping Austerity

Nearly two years after issuing the first-ever downgrade of its rating on U.S. debt, Standard & Poor’s upgraded its outlook on America’s credit from negative to stable. Monday’s announcement signals the ratings agency believes a further downgrade is unlikely in the near term, despite the declining “ability of elected officials to address the country’s medium-term fiscal challenges.”

What does S&P’s revised outlook mean for Americans? WonkBlog’s Dylan Matthews argues that market reactions to the move indicate sovereign debt ratings are irrelevant economically, but insofar as policymakers are influenced by the prominent ratings firm, the report bodes ill. While S&P didn’t explicitly peg its ratings outlook to the haphazard discretionary spending cuts known as sequestration, its rationale for the move was largely contingent on continued austerity. The report ends with a warning:

We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation’s longer-term fiscal challenges could place renewed downward pressure on the rating.

Yet “a deliberate relaxation of fiscal policy” is exactly what’s needed to accelerate the recovery, now in its fourth year of steady but slow progress, to the sort of pace required to reach full employment in the next few years. Austerity hasn’t sparked private-sector investment, and it’s undermined economic growth. That’s why it’s time to reset the fiscal policy conversation and move away from austerity. S&P’s vague caution to lawmakers runs counter to the facts laid out in a recent Center for American Progress report demonstrating America has a window of fiscal opportunity marked by rock-bottom borrowing costs and a trillion-dollar output gap.

The phrase “countervailing measures to address the nation’s longer-term fiscal challenges” hints at the sort of “grand bargain” President Obama has sought to craft with Republicans ever since the 2010 elections gave deficit hawks control of the House. But as CAP’s Michael Linden showed, Congress has room to revoke the next three years of sequestration and invest over $80 billion in the nation’s infrastructure and childen without either raising deficits or cutting safety net programs. In fact, the boosts to economic growth such investments provide would do more to improve the nation’s middle- and long-term fiscal situation than sequestration’s cuts.

Unless sequestration is undone, discretionary spending programs will have to cut another $19 billion in the coming fiscal year, which begins October 1. Those programs have borne the brunt of the $2.5 trillion in austerity enacted over the past three years, with per-capita federal spending dropping more rapidly in that time than it has since the end of the Korean War. Even before the spending caps come down by another $19 billion, sequestration is already paring back services crucial to society’s most vulnerable.