Update on the credit rating agency vigilantes

It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade.

…what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.
Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

The full story is here.  These vigilantes are real, but they are being scorned, dismissed, and moralized about rather than heeded.

The bottom line is that the nation’s long-run fiscal outlook matters now, even though you’ve had many top economists telling you for years that it does not.  I know all about the stability of Japanese bond rates following their credit downgrade.  In the American case, the mechanisms by which the long run matters can be as simple as Presidents seeking reelection and stubborn, irresponsible Republicans, not to mention spooked global markets latching on to scary focal points.

I see two lessons:

1. Moralizing about Presidents seeking reelection and stubborn, irresponsible Republicans does not remove their analytic impact.

2. The nation’s long-run fiscal outlook matters now.

Every time you see moralizing about #1, don’t let yourself be distracted from the truth of #2.  In fact, the more moralizing you hear about #1, the greater the import of #2.  Lots of moralizing about #1 is a sign that the overall political outlook, from the moralizer, is not robust to the truth and existence of #1.  Read the moralizing, but track the truth.


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