Saturday, August 6, 2011

Dean Baker on the US Downgrade



In short, there is no coherent explanation that can be given for S&P's downgrade. This downgrade was not made based on the economics. We can only speculate about the true motive.

5 comments:

SchittReport said...

excellent critique from dean baker.

it would have been even more precise had he examined the framework for S&P's "analysis". if you reverse engineer the framework from the analysis and conclusions, you would conclude that the whole set up was logically flawed. hence, the holes in the analysis which you could drive the titanic through.

in advisory speak "garbage in, garbage out".

S&P should have kept to the "check-box" services of old instead of trying to move into advisory services, which they are ill-equipped to do - incidentally (from 1st hand knowledge)their head of government ratings is definitely a "check-box" guy w/o a strategic bone in his body.

JKH said...

Tom,

What's the MMT interpretation of the following:

"The reference to Social Security also cannot be supported. The program is financed by its own designated tax. Under the law, if benefits exceed the money raised by the tax, then they are not paid. If S&P assumes that Social Security will add to the deficit in future years, then they are assuming that Congress will change the law in a way that no one is now proposing."

googleheim said...

stick it to Obama ?

stick it to China ?

is it a covert Operation ?

wink wink lower the dollar

for the puritan exporter farmers ?

googleheim said...

stick it to Obama ?

stick it to China ?

is it a covert Operation ?

wink wink lower the dollar

for the puritan exporter farmers ?

Tom Hickey said...

@ JKH

"The reference to Social Security also cannot be supported. The program is financed by its own designated tax. Under the law, if benefits exceed the money raised by the tax, then they are not paid. If S&P assumes that Social Security will add to the deficit in future years, then they are assuming that Congress will change the law in a way that no one is now proposing."

According to MMT, both S&P and Baker are off base here. The SS "box" is similar to the debt ceiling, no Treasury overdraft and other political restraints. As we know, taxes do not fund expenditure, but Congress can put a political restraint on certain expenditure that requires an offset by a dedicated tax. This just creates the illusion of "paying your way," since no political restraint can alter the operational reality of the monetary system. According to MMT, taxes still don't fund expenditure, just as tsy issuance doesn't finance it either.

MMT would say we will cross that bridge when we come to it and the decision will be a political one made in the context of the time. But there is no operational problem with the government allocating real resources to the elderly as long as 1) the real resources are available, and 2) the necessary appropriations make it through the political channel. Again, it comes down to willingness and not ability. The ability is always there if the resources are, and affordability is never the actual problem.

I suspect that people like Dean Baker, Michael Hudson, etc. get this, since I'm pretty sure that they understand basic MMT principles. But they prefer to adopt the mainstream paradigm when it suits their purpose, and this could be for a variety of reasons. I think that Baker is arguing that S&P is wrong even within the mainstream paradigm, since under that paradigm, or political restraints, however one views it, SS has the necessary funds in its trust fund presently, and it not a factor in the deficit or debt brouhaha. Most other progressive make this same case, too.

Moreover, as Warren has vouched, Beers knows better. The conclusion can only be that S&P's adenda is disingenuous and apparently politically driven.