Opinion: An excuse for slashing entitlements
Matt Stoller
August 9, 2011 06:37 AM EDT



With all the talk of Standard & Poor’s downgrade, no one mentioned that the ratings agency’s business model is, essentially, lying for money.

Instead, many politicians insist that the S&P downgrade is the reason for the market turmoil — not the banking freeze-ups in the Eurozone or political paralysis here. The credibility accorded to S&P by U.S. political elites shows that the rot is indeed deep — and worrisome.

Let’s note, at the start, that this downgrade was absurd. The credit rating of the United States is not in jeopardy. The U.S. government prints dollars — it can no more run out of dollars than a bowling alley can run out of strikes.

What’s really happening is an attempt by both parties to justify slashing Social Security and Medicare. Republicans have long wanted to roll back the New Deal. What is relatively new is that a Democratic president is now dead set on cutting these programs as well.

President Barack Obama, in his speech Monday about the downgrade, used the market turmoil as an excuse to do just that. After a debt ceiling deal in which the Democrats argued that defense spending cuts — not entitlement cuts — could close the long-term deficit, Obama said Monday that there’s “not much further” he can trim defense. Despite the fact that defense spending has gone up on his watch. Instead, Obama said, we need cuts in social spending, or, as he phrased it, “modest adjustments to health care programs like Medicare.”

In effect, there seems to have been a merger of both parties into a single force advocating for the interests of bondholders and the cutting of Medicare and Social Security. It’s why both Republicans and Democrats are now blaming each other for the downgrade — as though the downgrade were to be taken seriously.

So let’s look at S&P and then find out why it is so disturbing that this “downgrade” is being viewed as important.

First, if S&P calls for Treasury debt to be treated as a problem by the markets, Treasury borrowing rates should have increased. But they fell — because investors want to hold U.S. government debt as the world’s safest harbor.

Why trust S&P, anyway? Let’s review the carnage and incompetence of this company. It was, more than almost any other firm, a creator and catalyst for the financial crisis. And its analysts knew it.

In 2003, S&P used its power over mortgage financing to crush state anti-predatory mortgage lending laws around the country. Then, as the housing bubble grew, the company slapped AAA ratings on anything it could make money on. “Let’s hope,” one S&P analyst said, in a 2008 transcript released by Rep. Henry Waxman (D-Calif.), “we are all wealthy and retired by the time this house of cards falters.”

Two other S&P analysts talked in another transcript about the company’s rating methods for subprime securities. “That deal is ridiculous,” one analyst said. “… We should not be rating it,”

“It could be structured by cows,” the other analyst replied, “and we would rate it.”

This is what S&P is — it hasn’t changed. Right before the downgrade, in fact, the Treasury found that the company had made a $2 trillion accounting error.

This incompetence is by design
. S&P is always paid by the company issuing the debt it is rating. It’s as if a newspaper ran stories specifically sponsored and with editorial input from advertisers. Such a business is designed — and in many ways paid — to lie.

But we know this. So do President Barack Obama, House Minority Leader Nancy Pelosi (D-Calif.), Speaker John Boehner (R-Ohio), the longtime, and influential, deficit hawk Pete Peterson and every other elite political actor now fretting over this “downgrade.”

The question becomes: Why is S&P given so much credence?

The ratings agency has not been particularly important because of its predictive powers. Ratings agencies were part of a system that urged governments around the world to slash social programs and loosen regulations on business for fear of the wrath of international investors.

In the early 1990s, according to Canadian investigative journalist Linda McQuaig, Canadian corporate executives encouraged ratings agencies to threaten a downgrade of their nation’s credit as an inducement for cutting social spending and lowering high-end tax rates. It worked.

And today we are seeing that Republicans use ratings agencies to support their conservative agenda: that the government can’t spend so much on entitlements such as Medicare and Social Security. Benefits of public employee unions must also be slashed, public assets privatized and the disruptive power of unions countered.

The government, this argument insists, needs to be run like a business — and rated like one. That would make sense to S&P, whose parent company is run by Terry McGraw, who moonlights as a leader of the Washington corporate powerhouse, the Business Roundtable.

S&P’s downgrade may ultimately provide cover for the Democrats leadership, as well. They now have the excuse that can justify to supporters why they have no choice but to break promises made to senior citizens, unions and the public. For example, House Democratic Whip Steny Hoyer has been giving speeches for years advocating entitlement cuts.

So S&P is offering these politicians an excuse for a remarkably unpopular action. By treating this downgrade as meaningful, Democrats and Republicans could join in a bipartisan effort to slash entitlements — government social programs that are popular, work well and have relatively strong funding streams.

The reasoning is Orwellian. Medicare is cheaper and better than private health insurance — which is why we cannot afford it. Social Security may run out of money in 27 years— why it’s important to cut the payroll tax that funds it. The Bush tax cuts for the wealthy should be extended indefinitely — but the prospect of Social Security and Medicare for everyone else creates a fiscal emergency.

The rush is on to carve up what’s left of social spending — and everyone’s represented but the public. Sens. Tom Coburn (R-Okla.) and Joe Lieberman (I-Conn.) are now introducing legislation to cut entitlements to fund the defense budget. And Defense Secretary Leon Panetta has urged cuts to Social Security and Medicare rather than the military.

There’s a big problem in destroying these entitlement programs, however. It’s not just the increase in poverty and suffering. These programs, which people have paid for with payroll taxes for their entire lives, give Americans a sense of why it’s useful to support the government as legitimate. To see what happens when a social contract falls apart, look at the massive rioting in London.

Middle-class incomes are down radically in the U.S. since 2007, as much as 15 percent according to new Internal Revenue Service data. Home equity is still falling. If cherished entitlement programs are also savaged by the politicians who destroyed our life savings, citizens might begin to question whether this whole constitutional democracy thing is worth it.

Strange and ominous political eddies are already emerging. Congressional disapproval is higher than 80 percent. This could turn ugly — as it has before in U.S. history. While we’ve airbrushed the legacy of political violence out of U.S. history, it’s there. Labor conducted gun battles with Pinkerton private military forces in the late 19th century. Strikes often turned deadly in the 1930s. If there are serious defense cuts, the prospect of hundreds of thousands of war-weary former soldiers thrown into a terrible economy is not, shall we say, a recipe for social stability.

With proposals on the table to cut defense and social spending in a deflationary economy, maybe U.S. political leaders are just throwing one final, blow-out empire-ending party.

I don’t mean to push the panic button. After all, America has a stable political order that can handle a great deal of stress. This system, though, is rooted in a middle class that believes its interests are aligned with those running the country.

As the wealth, opportunity, social status and economic security of the middle class evaporate, so, too, could this belief.

We don’t not want to find out what happens if we should reach that point. But if politicians keep using S&P to justify bondholder-friendly policies that damage the interests of the middle class — we just might.

Matt Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.). He is now a fellow at the Roosevelt Institute.

Category: Analysts, Politics

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “An excuse for slashing entitlements”

  1. WaveCatcher says:

    I consider myself a pseudo-Libertarian and yet I find myself agreeing with Matt here.

    The worst part about how we’re implementing Socialism is that we’re doing it by layering it on top of our existing corrupt system that is is now run for the benefit of large business and government. If we’re going to do Socialism, let’s do it right and leverage existing socialist programs that are working, such as Medicare instead of layering it on top of our corrupt quasi-private health care insurers and providers.

  2. Bob A says:

    Right wing crazies like Socialism just as much as any card carrying communist. They just only like Socialism that benefits them.

  3. machinehead says:

    ‘Medicare is cheaper and better than private health insurance’

    Only if you don’t count the tens of trillions in unfunded promises it’s run up — see the Financial Report of the United States for details.

    In his own way, Stoller lies just as shamelessly as S&P does to buttress his gov-lover ideological agenda.

    Stoller’s comment that ‘The U.S. government prints dollars — it can no more run out of dollars than a bowling alley can run out of strikes’ is appalling. Like crack dealers operating a storefront in broad daylight, today’s inflationist fraudsters brazenly flaunt their sociopathic contempt for price stability.

    Probably Stoller would call himself a Keynesian. But he’s a selective Keynesian, ignoring the economist’s dictum that ‘Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.’

  4. brianinla says:

    >Matt Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues

    He got a government paycheck for doing what exactly? If he also worked on the Obamacare bill then he’d be totally useless.

  5. Fred C Dobbs says:

    This is one of the worst series of rants ever posted on this quality blog. It is a succession of generalities, and opinions, without any basis in facts. For example, according to this former DC know-it-all, every thing comes out of S&P is one big fat lie, just because a few employees of S&P disagree with a few opinions S&P issued. Over-generalization is probably the most numerous and ancient fallacy. Ad Hominem (the purely emotive argument that something must be untrue not because it is, in fact, untrue, but because it was uttered by someone the arguer dislikes with) is another. No wonder the US is in trouble, if this is the best the brightest can do. It would be constructive, if the author would give us reasons and facts to support an argument to continue and/or increase entitlements, just as it would be helpful if the President revealed his ideal budget. If he and the President revealed what they think with work, it might be discussed in the public and compared with competing arguments for the solution of the US’s financial plight. If they have good ideas, there are doing us Americans a disservice to conceal them.

  6. RW says:

    Any excuse will do of course but we have nearly reached the point where excuses aren’t even necessary, Machinehead’s completely incoherent response to Wavecatcher being a case in point; why bother with excuses when the wheat asks to be cut down?

  7. davossherman@gmail.com says:

    This is why outlines are important.

    He answers his own question: Cutting social welfare results in poverty riots and more suffering.

    There is 1 answer and 1 answer only – revalue the effing dollar and lets move the eff on here. TS will HTF before Bernanke and moron Geithner and the 535 (Ron and Rand excluded) morons in Congress come to this conclusion.

  8. constantnormal says:

    Sorry folks. I agree with S&P on this one. Sometimes even a blind pig can find an acorn, or a clueless idiot can stumble onto the correct answer, if only by accident.

    There is a piece in next week’s issue of The Economist regarding the downgrade. Here is a link to it:

    America’s downgrade- Substandard & Poor | The Economist

    And the clincher is the closing paragraph:

    “Above all, S&P’s verdict is based on the uselessness of America’s politicians: both their inability to deal with the budget and their vividly displayed political brinkmanship. S&P argues that America’s policymaking has become less predictable and its finances less manageable. The threat of default, previously unthinkable, is now a bargaining chip in Washington. This is not how an AAA-rated country behaves. S&P did America a favour by pointing this out.”

    I agree. This is NOT how a AAA-rated country behaves. Regardless of our capability to pay our debts, we now have a substantial contingent of lunatics in our government who are bent on taking extreme actions to immediately correct a debt problem that has been building for decades. One must distinguish between capability and intent. The downgrade was justified, as we have idiots fighting for control of the nation.

  9. constantnormal says:

    But the author is correct about the overall goal here. The goal is to roll our society back to the 19th century.

  10. franklin411 says:

    Great article here, Mr. Stoller.

    But if I were him, I would cite the example of the West Virginia Mine Wars of the 1920s, which also occurred during a period when unions were being crushed and both political parties were dominated by conservatism.

    Interesting fact: The Battle of Blair Mountain in 1921 was the only occasion in American history when the American government used bombers against its own citizens.


  11. Bob A says:

    “But the author is correct about the overall goal here. The goal is to roll our society back to the 19th century.”

    Yep. Back to the good old days of a “Nobelman’s Paradise”

  12. Francois says:

    It’d be nice if you could come up with a thought instead of spewing labels, innuendos and insults like you did.

  13. Joe Friday says:


    Only if you don’t count the tens of trillions in unfunded promises it’s run up


    Non-profit Medicare is FAR more efficient that the bloated greedy for-profit private-sector.

    With Medicare, there are no insurance companies raking off excessive profits. About half of every dollar one pays in private-sector health insurance premiums doesn’t go for medical care. Something like 25% of every premium dollar is administrative overhead and profits, another 15% is lost to fraud by the providers, and the rest is sales commissions and other outside miscellaneous expenses.

    The administrative overhead in Medicare is like 2%.

    That’s why private-sector healthcare costs are rising faster than Medicare.

    The only problem Medicare has is it is purchasing medical care from a greedy bloated inefficient private-sector medical industry.

  14. Joe Friday says:


    The Economist opinion piece is just further evidence that the call that S&P made was political, not financial.

    CUI BONO ?

    As I posted elsewhere, the ratings agencies took money to rate junk as AAA. They were whores and it was all about the Benjamins.

    S&P downgrading U.S. treasuries is like a streetwalking hooker on the corner complaining that my girlfriends skirt is too short.

  15. jadogsl says:

    With the markets in turmoil and the global financial architecture groaning under the weight of fraud and corruption, it’s a good time to think about what leadership would look like. Believe it or not, we have had good leadership, purpose, integrity, and aligned interests in this country.
    Dylans’ Rant

    Like i have said many time….. The only fix is a 3rd party.
    People are listening now.

  16. Winston Munn says:

    The troubling aspect is that the U.S. government is acting as if the social programs enacted were nothing more than benefits offered by a corporation to employees, of which the corporation certainly has the right to modify or even cancel at its whim; but social programs are closer in nature to contractual obligations than benefits, and an argument could be made that all U.S. government discretionary spending (such as defense) would have to be eliminated before the contractual obligations could be altered.

    I doubt anyone will care, though, until the riots get to their part of town.

    What we are witnessing is the final chapter of the story written by Ronald Reagan, Alan Greenspan, Dick Armey, et al, who all seemingly read one too many Ayn Rand novels while sucking on the hash pipe of American Exceptionalism.

    They thought that if they cut John Galt loose without adult supervision, he’d create the perfect world; turns out, all he did was steal the silverware.

  17. Blurtman says:

    Perhaps the Social Security trust fund should not have lent its trillions to a deadbeat, psycho borrower.

  18. Jo says:

    @Joe Friday

    Every aspect of buisness and economic & monetary policy is politcal – which is why MMT is utter nonsense.

  19. ReductiMat says:

    Barry, how does one guard against confirmation bias? Seemingly everything you throw up here I not only have a hard time disagreeing with, but I find myself wanting to pin it to every street post.

    Keep it up, and keep finding gems like Matt, Invictus, et al.

  20. theexpertisin says:

    Republicans want to “roll back the New Deal”…what??

    Match the largesse of circa 2011 Social Security benefits covering every social malady and age group from soup to, literally, nuts, with what Roosevelt and the Democratic Congress passed in the mid-1930s.
    I believe FRD would have had his fatal stroke much earlier had he seen his basic survival supplement evolve into what is presently a super-bureaucracy.

    Medicare carries the same albatross of an expansion orgy the original Act never envisioned.

    Republicans have finally woken up. Democrats are now worried about power and their generally non-productive consituencies.

  21. mathman says:

    @ Blurtman: i’m with you on that sentiment. Who decides that all profits are corporate while all debts are public – like the bank bailout fiasco? With regard to the social security trust fund – who decided it was okay to “borrow” (hint, hint, wink, wink, nudge, nudge, say na more, aye?) it in the first place?

    “Our elected leaders” do what they want after being elected (and, once again – who chose those people in the first place?). We the people are the “marks” in this game of politics by and for the wealthy.

    The next election, for example, will be all Republicans (including Obama), so who cares which jerk “wins” – we all lose!

  22. dougc says:

    Let’s face it if we cut defence spending by one dollar either Canada or Mexico would invade tomorrow and let’s not forget the Iranian fleet of intercontinental flying carpets they carry fleas. Actually I have a brother that would agree with this , sarcasm is a dangerous weapon.
    Defence spending is mostly to protect US corporate overseas interest by preventing seizure. The corporations also benefit by selling $12 hammers for $400 dollarsT.his refernce is somewhat dated (Reagan administration). You could tax corporation to finance this expense but would never fly in this corporatocracy.

  23. UncleMilty says:

    The author suggest those of us who want to cut entitlements are purely motivated by some crazed political desire to punish poor old people. Do you really think Republicans and Tea Party folks just hate hold people? The vast majority of the Rs and TPs will eventually become old people and most would lose their own benefits as well.

    The problem is that the baby boomer generation (i.e. the people they elected) promised themselves more in entitlement benefits than they set aside in tax dollars. At the same time, we’ve taken almost half the population and completely removed them from the tax system. And probably 25% of us actually get refundable credits.

    What we have here is intergenerational theft. One generation inherited a balanced budget, solvent entitlements and unparralleled technological innovation and economic growth. They will retire with huge unfunded liabilities, massive budget deficits, poorly parented children, a weakening educational system and an economy that is structurally unsound.

    Modest cuts implemented over time are more than the boomers deserve.

  24. ZackAttack says:

    This view certainly explains a great deal about what was and was not allowable discourse during the entire manufactured crisis.

  25. Global Eyes says:

    Maybe it’s a demographic thing:

    Break a social contract with a younger generation and you have raging riots a la London.

    Break a social contract with an aging generation and things would be different but hardly violent. Fewer cruise ships and lower home prices seem likely.

    But it might also inspire the younger generation to new heights and consequently advance civilization. That’s the part I like best.

  26. ilsm says:

    The Brits should have sent the Paras in their Chinooks, the enemy do not have RPG’s in London.

    What they are off keeping Karzai from his fate at the hands of his enemies?

    The wars and the war profiteers can contribute $4500B in the 10 years covered by the facetious debt commission.

    Remove that armorers’ yoke from the US.

    The part of the world to worry about collpased under the weight of their war jobs, generals’ chest thumping, war profiteers impediments 20 years ago.

    Fewer BMWs and Audis in US war facilities will take care of the US deficit.

  27. Petey Wheatstraw says:

    theexpertisin Says:

    “Republicans have finally woken up. Democrats are now worried about power and their generally non-productive consituencies.”

    You mean the Republicans who just had the big Jesus rallies ’cause only God Almighty is capable of unwinding the mess they made? The one’s who don’t understand science, much less exactly what science is? The ones who want to accelerate the wealth transfer to the top 1% before their chance to do so is wasted? The ones with “business experience,” who mask their greed by claiming to be “job creators?” The same Republicans, like Rick Scott of FL, who come to power by fanning the fires of fear by accusing liberals of wanting death panels for grandma, only to kick her old, sick ass to the curb at the first opportunity?

    Those Republicans?

    The Republicans have not woken up. They are comatose — having shifted position only because stewing in their own feces was giving them bedsores.

    As for non-productive constituencies, how do you explain the welfare states being primarily governed by Republicans?

  28. arbitrage789 says:

    I don’t WANT entitlement cuts, but I see them as necessary… and inevitable. But cuts in entitlements shouldn’t be the FIRST place the politicians go. I’d say, first cut discretionary spending, then lop $200B/year (or so) from the military, then impose means testing on Medicare recipients, and only after all those cuts are in place, should they start coming after the “little guy”.

  29. @dougc,

    Be careful Doug. We have hockey players up here in Canada….with sticks. Plus we have planted many in your country. Don’t underestimate us and our hockey sleeper cells

  30. Joe Friday says:


    The author suggest those of us who want to cut entitlements are purely motivated by some crazed political desire to punish poor old people.

    Nah, they’re just greedy.

    The problem is that the baby boomer generation (i.e. the people they elected) promised themselves more in entitlement benefits than they set aside in tax dollars.


    The American RightWing simply slashed revenue WELL below what it takes to operate government.

    At the same time, we’ve taken almost half the population and completely removed them from the tax system.

    I take it you mean just the federal income tax system (they still pay sales taxes, state taxes, local taxes, Social Security taxes, Medicare/Medicaid taxes, and many pay property taxes).

    AND ?

    When the federal income tax was originally enacted, it only applied to incomes above $500,000.

    What we have here is intergenerational theft.

    No, what we have here is Socialism for the Rich & Corporate in the form of tax cuts for the Rich & Corporate that are unpaid for, Corporate Welfare that is unpaid for, two wars that are unpaid for, and subsidies for the oil, gas, timber, and mining industries that are unpaid for.

  31. Joe Friday says:


    Every aspect of buisness and economic & monetary policy is politcal

    It’s just not their job.

  32. pintelho says:

    Great job as always..nice to see Ritholtz let you in here.

    Don’t forget the ultimate tragedy of all…The bond buyers are the same people who are benefiting from the generous tax treatment…

    They get taxed lower on their income, plus they get paid interest on the bonds they are buying…and you bet they are the first to get paid if somehow we do default….

    Yet the people who need the services offered by Social Security and Medicare are getting the raw deal.

    Heads they win, Tales we lose.

    Keep fighting.
    Jorge (from the old days at MediaInTrouble and BlueJersey)

  33. DeDude says:

    Don’t rob me of the entitlement’s I paid for, increase taxes on the rich.

    The rich have looted the benefits of all the wealth created in the past 3 decades. It is time for society to demand some of that wealth back, so it can be distributed to those hard working people who paid their social security and Medicare taxes, expecting and deserving to have these benefits available when they need them.

    This is not just an issue of fairness but an essential part of getting our economy to grow again. The rich has way more money than they can productively invest, and as a result they are blowing damaging bubbles in assets and commodities. In contrast, the consumer class is hurting from increased prices in commodities and falling real incomes. As a result they cannot increase consumption and give businesses the increased costumer base they all say they need before they can expand. Half of the population has lost so much income that they are not even earning enough to be liable for income tax (talk about a clear indication that we must do something to redistribute income back to a more normal pattern). We cannot get sustainable growth without a fair distribution of the wealth created by the hard working people of this country and stolen from them by rent-seeking rich oligarchs.

    For those businesses that believe in private sector solutions; I urge you to use some of all that cash accumulated on your balance sheets to give lower paid employees a nice big Thanksgiving bonus. First of all they deserve some love from the company they worked so hard to make profitable. Second they would spend it on X-mas and, thereby, quickly help getting the economy going again. Lets see some of those job creators get off their lazy assets and create some jobs. If you cannot handle it then let government take it all over – they couldn’t possibly do any worse than you are right now.