Published on the Real-World Economics Review Blog, by Dean Baker, July 29, 2011.
Policy debates in Washington are moving ever further from reality as a small elite is moving to strip benefits that the vast majority need and support. The battle over raising the debt ceiling is playing a central role in this effort … //
… The claim that the deficit is a chronic problem and not primarily the result of a severe cyclical downturn also opens the door for cuts to the country’s major social welfare programs. These cuts are hugely unpopular. All three major programs enjoy overwhelming support among people in all demographic groups, including conservative Republicans. There is no way that an ambitious politician would ever suggest major cuts to these programs apart from a crisis.
In this respect, the crisis over the debt ceiling is the answer to the prayers of many people in the business community. They desperately want to roll back the size of the country’s welfare state, but they know that there is almost no political support for this position. The crisis over the debt ceiling gives them an opportunity to impose cutbacks in the welfare state by getting the leadership of both political parties to sign on to the deal, leaving the opponents of cuts with no plausible political options.
To advance this agenda they will do everything in their power to advance the perception of crisis. This includes having the bond-rating agencies threaten to downgrade U.S. debt if there is not an agreement on major cuts to the welfare state.
In principle, the bond-rating agencies are only supposed to assess the likelihood that debt will be repaid. However, they showed an extraordinary willingness to allow profit to affect their ratings when they gave investment grade ratings to hundreds of billions of dollars of mortgage-backed securities during the housing bubble. Given their track record, there is every reason in the world to assume that the bond-rating agencies would use downgrades or the threat of downgrades for political purposes.
This means that the battle over the debt ceiling is an elaborate charade that is threatening the country’s most important social welfare programs. There is no real issue of the country’s creditworthiness of its ability to finance its debt and deficits any time in the foreseeable future. Rather, this is about the business community in general, and the finance sector in particular, taking advantage of a crisis that they themselves created to scale back the country’s social welfare system. They may well succeed. (full text).