It would be easy to shoot the messenger as the stock markets plummeted again Monday following the first downgrading of the nation's credit rating. After all, Standard & Poor's contributed to the economic collapse by slapping good credit ratings on risky mortgage-backed assets and was paid handsomely for it. And S&P acknowledged it made a $2 trillion error in its calculations as it decided to downgrade the United States' credit rating Friday night. Yet some good can come from this shot across the bow if it forces a divided Congress to more responsibly deal with reducing the federal deficit and creating jobs.
Americans are paying for S&P's presumptuousness and Congress' failure to compromise. The stock market's initial reaction — the Dow plunged another 634 points, or more than 5.5 percent, Monday — meant 401(k) retirement plans took another big hit. S&P followed up by downgrading the credit ratings of mortgage finance companies Fannie Mae and Freddie Mac, and similar decisions may be imminent for local governments such as Hillsborough County. Potentially driving up borrowing costs for mortgages, credit cards and local governments amid high unemployment and minuscule economic growth is not a prescription for recovery.
S&P focused less on number crunching than on the political paralysis in Washington, which is hardly a revelation to Americans who have a dim view of Congress. This credit rating downgrade would not have happened if President Barack Obama had been able to persuade House Speaker John Boehner to aim higher for a $4 trillion deal. It would not have happened if Republicans would have been willing to raise revenue and Democrats would have been willing to reform entitlements. And it would not have happened if the tea party movement and its Republican allies did not hold the country hostage with their uncompromising ideology. U.S. Sen. Marco Rubio and U.S. Reps. Connie Mack of Fort Myers and Dennis Ross of Lakeland, who would not even vote for last week's compromise to avoid creating a bigger financial crisis, reflect the rigidity that has to ease for Congress to act responsibly.
The credit downgrade further erodes consumer confidence and increases the pressure on Washington to make significant progress on creating jobs and reducing the deficit by the end of the year. First, congressional leaders must choose wisely as they appoint members to a bipartisan committee charged with creating a grand deficit reduction plan by Thanksgiving to cut at least $1.5 trillion. If Republicans and Democrats stack the committee with their most partisan members, the chances for compromise will be remote. Second, any meaningful compromise will have to include more revenue and reasonable changes to entitlements such as Social Security and Medicare along with spending cuts. And third, equal attention has to be paid to creating the jobs that will trigger the spending that will reinvigorate the economy.
Obama on Monday renewed his call for Congress to extend a payroll tax cut and unemployment benefits. That is a start toward continuing to help those who need it most. But more needs to be done, and plans to cut spending cannot snuff out smart investments that will create jobs and expand the economy. Conservative Republicans seized on the downgraded credit rating and Monday's stock market plunge to promote deeper spending cuts with no new revenue or investment. That would be the wrong approach. The Obama administration and more thoughtful members of Congress from both political parties should refocus on a compromise that combines investment and new revenue with spending cuts and clearer priorities.