It might have more to do with the country’s political dysfunction than with its solvency.
On August 1, the Fitch Ratings agency downgraded the United States’ long-term credit rating from AAA to AA+ for only the second time in the nation’s history, in what’s generally seen as a signal of concern about the US’s creditworthiness.
Many seemed perplexed by the move. Former Treasury Secretary Lawrence Summers called it “bizarre and inept,” economist and Bloomberg columnist Mohamed El-Erian said it was “strange,” and the White House said in a statement that the move “defies reality.”
In a statement, Fitch cited three reasons for downgrading the US rating: concerns the US economy is going to deteriorate over the next three years; a high national debt; and repeated political standoffs over managing the country’s finances (specifically, brinksmanship over the country’s self-imposed debt limit, the cap on how much to US can borrow to pay its bills).
However, many economists and other financial experts have expressed bewilderment over the motivation for the downgrade. The agency provided little hard data to back up its stated concerns about looming economic collapse, said Stephanie Kelton, a professor of economics and public policy at Stony Brook University. And many experts disagree with Fitch’s pessimistic view of the country’s financial future.
“If you don’t have credible evidence of a long-term inflation problem, then you don’t have reason to be concerned about a long-term debt problem,” said Kelton.
The real reasons for the downgrade, Kelton said, may be less related to the US’s ability to pay its debts, and more related to its willingness to do so. That much was clear from the agency’s repeated mention of its concerns about the country’s “erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” specifically with respect to difficulties in raising the debt ceiling, oscillations in tax policy, and increases in government spending.
Whatever stimulated the move, both history and math suggest the changed credit rating will not have meaningful effects on the US economy. Who is Fitch and why does anyone care what they think?
Fitch is one of the three big independent credit rating agencies whose takes on countries’ creditworthiness really matter on the world stage. The other two are Standard & Poor’s and Moody’s.
These credit rating agencies’ credibility is rooted at least in part in tradition. All three have come under some fire in the past — notably, for exacerbating Europe’s financial crisis between 2008 and 2012 by overrating struggling financial institutions and underrating several European countries.
