S&P sends message to Obama, Republicans

Standard & Poor’s decision to downgrade the long-term outlook on the United States’ stellar credit rating is a warning to Congress and President Obama that it’s time to work together on serious deficit reduction.

The ratings agency essentially issued a political assessment when it changed the long-term view of America’s AAA credit rating to “negative.” S&P cited the “increased risk that political negotiations” over how to lower deficits will drag on beyond the 2012 elections.

Traders working at the New York Stock Exchange. (PETER FOLEY / Bloomberg News)

A top-grade rating is important because it assures investors that U.S. Treasury bonds are the world’s safest investments. A downgrade would raise the costs of borrowing, and force the federal government to spend more on interest payments. That would mean less money for all other needs, from national parks to education to veterans’ health care.

The news Monday had a more immediate impact, sending the value of U.S. stocks down more than 1 percent in a single day of trading. And, as if prophetic, it fueled more partisan rhetoric in Congress over the coming battle to raise the nation’s debt ceiling in July.

S&P is one of three major credit-rating agencies, and it’s not the last word on the U.S. economy. Another agency, Moody’s, said it was encouraged that lawmakers in Washington are talking seriously about deficit reduction.

But there can be no doubt that the federal government’s finances are in a perilous state, with annual deficits of more than $1 trillion and a national debt of $14.3 trillion. The United States is the only industrialized nation without a plan to lower its debt.

Analysts at S&P downgraded their outlook because of several developments. One was the $858 billion deal between congressional Republicans and Obama in December to extend the Bush-era tax cuts through 2012. Both sides said it was needed to boost the economic recovery, but it also threw the federal budget even further out of balance.

Another factor was Obama’s failure to endorse the recommendations of his own bipartisan deficit-reduction commission to reduce borrowing by $4 trillion over the next decade.

Within the last month, both the president and House Republicans have unveiled plans to lower deficits. The GOP wants to cut $4.4 trillion over 10 years; Obama, $4 trillion over 12 years. But they differ vastly in their approaches. Both sides appear to be hardening their positions as the crucial election year looms closer.

Republicans refuse to consider tax increases, only lately proposed reductions in defense spending, and would impose sharp cuts on Medicare and Medicaid while slashing tax rates for the wealthy. Obama wants to raise taxes on the wealthy while cutting defense spending as well as other programs.

The president said he sees reason for optimism. “There is general agreement that we need to cut spending by about $4 trillion over the medium term,” Obama said Tuesday in Virginia. “And when folks in Washington agree on anything, that’s a good sign.”

But Obama’s deficit-reduction tour this week looks more like the start of his reelection campaign than a foundation for serious bipartisan negotiations. And the Republicans’ harsh reaction to his deficit-lowering plan suggests that they aren’t serious about negotiating a long-range agreement with Democrats either.

The president said he’s fighting to save investments in education and infrastructure from the GOP chopping block. Those are goals worth pursuing. But increasingly, this debate looks like a theoretical battle driven by partisanship that will only lead to the national debt’s growing even larger.