That is the question that the Financial Times reporter should have asked when Moody's apparently threatened to downgrade U.S. debt within a decade if the country does not reduce the projected growth of Medicare and Social Security. This threat is very odd for several reasons. First, it is not clear why Moody's would be concerned about the composition of U.S. government spending. Lenders have reason to be concerned about the overall budget balance, but they have no obvious interest in the composition of spending. The United States recently increased its defense spending by more than a percentage point of GDP to cover the cost of the wars in Iraq and Afghanistan. If the government reduced defense spending to pre-war levels, as an alternative to cutting the cost of Social Security and Medicare, it is difficult to see why lenders should care. It is also odd that Moody's would single out Social Security. Its cost is not rising at an especially rapid rate, in a decade its cost will have just risen back to its 1983 level measured as a share of GDP. Presumably, bond holders don't have any particular reason to object to spending on Social Security, so it is difficult to see why a bond rating agency should. In the same vein, it is also possible to make up projected budget shortfalls with tax increases. Bondholders presumably care about borrowers ability to pay off their debts, they have no reason to care about the tax rate in the debtor country -- especially since tax rates in the U.S. would still be far below the OECD average even if they were raised by several percentage points. The Financial Times reporter (and other reporters) should have asked why one of the world's leading bond rating agencies would make such an unusual intervention into U.S. domestic politics. Such detailed policy prescriptions for the United States are certainly rare, if not unprecedented. In this context, it is worth noting that Moody's could face legal difficulties due to its recent rating practices. It gave top credit ratings to tens of billions of dollars of securities that were partially backed by very risky subprime mortgages. Now that these bonds are being written off at a very rapid pace, there may be some legal consequences for Moody's. Moody's potential legal problems should have been mentioned in the context of this intervention into U.S. politics. This is also a topic that deserves more careful examination from the media generally.
--Dean Baker
